Manufacturers unsure of capital sources

Ontario’s small- to mid-sized manufacturers are frustrated with the way they are treated by banks but are unfamiliar with the non-traditional sources of financing that are available to them, according to a report by ZED Financial Partners.

The report, entitled Beyond Banks and Borders: Forum on Non-Traditional Finance for Ontario Manufacturers, reflects the thoughts of several representatives from the manufacturing sector, which is struggling against the current of the rising loonie.

“Many participants [in the forum] claimed that political leaders were supportive of the manufacturing sector in principal but had yet to translate this into action,” the report says. “In their opinion, manufacturing is the most important sector of the economy yet is not given the attention it deserves.”

As the dollar cuts ever deeper into exports, many manufacturers are struggling to raise the capital they require to remain competitive.

Many of the participants said they felt banks made poor sources of capital, as they would provide loans to manufacturers only during good times, when the loans were not really needed. Once a manufacturer hits a rough patch, and actually needs the capital, the banks are far less accommodating.

Although mid-sized manufacturers view them with distrust, the banks remain the dominant providers of capital, if for no other reason than their high visibility. The forum uncovered several misperceptions about non-traditional finance, with many manufacturers surprised to learn that financiers would be interested in taking a stake in smaller operations.

The forum defined mid-sized manufacturers as those with revenues between $40 million and $100 million a year, employing between 100 and 500 workers — just the type of operation that mezzanine financiers look for.

At the other end of the scale, participants equated all non-traditional finance with venture capital, and considered their businesses to be too mature to offer the kind of growth that a start-up offers, therefore making it less attractive to potential partners.

According to the report, many manufacturers fear that taking on a financial partner would mark the beginning of their loss of control, as the partner would become ever more involved in day-to-day operations and possibly use their equity stake as a springboard for a takeover bid.

But taking on a financial partner is of particular interest to those business owners who are planning their retirement and would like to fund the next stage of their lives by selling the company they built.

“Non-traditional finance can offer a critical mechanism to help businesses grow, acquire, refinance or transition,” the report says. “By tapping into large pools of international capital through private equity and private debt, mid-sized Ontario manufacturers can access some incredible alternatives to highly secured bank financing.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com