Key Financial Challenges for Small and Midsize Manufacturers – and How Marketplace Lending Helps

Small and mid-sized manufacturers are the backbone of industry and local economies. In fact, manufacturers are among the most impactful small businesses – every dollar invested in local manufacturing generates an estimated $1.89 in additional community economic activity. Yet, despite their importance, many of these manufacturers face persistent financial hurdles that hinder their growth. Nearly 60% of U.S. manufacturers have fewer than 10 employees, meaning the majority are very small firms that often struggle to access the financing they need to expand and thrive. It’s no surprise that access to capital consistently ranks as the number one constraint for small businesses in America. In one recent Federal Reserve survey, 85% of small employer firms experienced financial challenges in the past year – a clear indicator that funding and cash flow issues are widespread. Below, we dive into the key financial challenges facing small and mid-sized manufacturers across industries – from working capital shortages to difficulties financing new equipment – and explore how innovative marketplace lending solutions (such as those offered by RelFi) are helping manufacturers navigate these challenges by matching them with the right lenders.

Access to Capital Roadblocks

Accessing growth capital is often the first and biggest hurdle for smaller manufacturers. Traditional banks have stringent credit requirements and often view small manufacturers as higher-risk, especially if they are young companies or have limited collateral. This can make getting a loan or line of credit painfully difficult. For example, amid recent tight credit conditions, regional banks have been rejecting about 80% of loan applications from small and medium-sized businesses, and big banks turn down 87%. In other words, only a small fraction of manufacturing entrepreneurs secure the full funding they request from traditional lenders. A Federal Reserve study found that only 31% of small business loan applicants received all of the financing they sought in 2021 – down from over half just a few years prior.

With bank approval rates so low, many small and mid-sized manufacturers are forced to seek alternative means of financing (or give up on expansion plans). It’s common for owners to tap personal and family resources to keep the business running. About 46% of small businesses use personal credit cards to fund their operations, blurring the lines between business and personal finances. While this can provide a short-term fix, it also raises risks and limits growth. In one survey by the National Small Business Association, 27% of businesses said they could not obtain the funding they needed, and the primary impact was that it prevented them from growing. Simply put, a lack of access to affordable capital can leave manufacturers stuck in place, unable to invest in new projects, hire workers, or bid on larger contracts. This access-to-capital gap underpins many of the other financial challenges discussed below.

Working Capital Constraints

Even for manufacturers that do secure projects or steady sales, managing day-to-day cash flow is a constant challenge. Manufacturing typically involves upfront costs – purchasing raw materials, paying suppliers and employees – long before payment is received for finished products. This timing gap means working capital (the cash available for daily operations) can be strained, especially for smaller firms with limited cash reserves. In recent years, record inflation and supply chain disruptions have further squeezed working capital as input costs rose and lead times stretched.

When working capital runs short, manufacturers face tough choices in juggling expenses. Research shows that inadequate working capital has very real consequences for small businesses’ operations. For example, due to cash flow shortfalls:

• 17% of U.S. businesses have struggled to purchase needed inventory or supplies to fulfill orders, directly limiting their ability to generate sales.
• 32% of businesses have cut staff hours or downsized operations because they didn’t have enough cash on hand to cover payroll.
• 28% of small businesses have made late payments on bills or operating expenses as a result of working capital challenges.

These statistics underscore how cash crunches can ripple through every aspect of a manufacturing business – from production capacity to employee retention and credit relationships. It’s hard to grow when you’re constantly plugging cash flow gaps. Notably, covering operating expenses is the most common reason small firms seek financing in the first place. Yet many still come up short. By one Fed estimate, 31% of businesses struggle with getting credit to pay for operating costs. When traditional loans or lines of credit aren’t available, manufacturers may resort to costly options like merchant cash advances or factoring at high fees, which can compound the strain on future cash flows.

Equipment Financing Gaps

Manufacturing is a capital-intensive industry – success often hinges on having the right machinery, technology, and facilities. However, financing these big-ticket investments is another major pain point for small and mid-size manufacturers. Upgrading an aging piece of equipment or buying a new machine tool can easily cost tens or hundreds of thousands of dollars, a sum that most small firms cannot simply pull from their coffers. Equipment financing and leasing are essential tools to spread out these costs, but accessing such financing isn’t always straightforward for smaller companies.

Traditional lenders might be hesitant to finance specialized equipment for a small firm without a long track record or strong balance sheet. Even when loans are available, they may require significant down payments or collateral. As a result, needed upgrades are often deferred – which can hurt productivity and competitiveness – or paid for out of pocket, which drains working capital. Industry data shows just how critical financing is in this arena: the U.S. equipment finance market reached an all-time high of $1.34 trillion in 2023, with 82% of businesses using some form of financing (loans, leases, or lines of credit) to fund equipment and software purchases. In other words, virtually no manufacturer can grow without leveraging financing for capital assets.

For small manufacturers, the challenge is finding financing on terms they can manage. Many are turning to alternative equipment finance providers or government-backed programs (for example, the SBA 504 loan program for manufacturing machinery). But gaps remain. When working capital is tight, firms may lack the down payment for a new machine. Or if their credit is less than perfect, they might only qualify for high-interest equipment loans. This financing gap delays equipment upgrades, and by extension, limits a plant’s efficiency and capacity. It’s a catch-22: you need better equipment to increase revenue, but you need more revenue (or collateral) to afford better equipment.

Leading with Insight

Facing challenges from capital access to cash flow management, today’s small and midsize manufacturers must be as resourceful in financing as they are in production. Understanding the landscape – and knowing about alternative solutions – is half the battle. By leveraging marketplace lending and other innovative financing tools, manufacturers can fill working capital gaps, finance new equipment, and fund expansion without derailing their operations or growth. The key is finding the right funding partner for the specific challenge at hand.

RelFi’s role in this ecosystem is to be a financing partner and resource for manufacturers. Through a marketplace approach, RelFi brings a research-driven perspective to match businesses with lenders who truly fit their needs.

By staying informed on financial trends and solutions, and tapping into platforms like RelFi, small and midsize manufacturers can turn financial challenges into opportunities.