For many growing manufacturers, strong sales don’t always translate into a stronger cash position.

A company may be winning new contracts, maintaining healthy margins and operating at increased capacity, yet still find itself relying heavily on its revolving line of credit to fund day-to-day operations.

The challenge often becomes more pronounced as the business grows.

New orders require raw materials, labor and inventory well before customers settle their invoices. Larger contracts can involve longer production cycles, higher upfront expenditures and more capital tied up in receivables.

As revenue increases, so does the amount of working capital required to support it.

Eventually, a credit facility that once comfortably supported the business may no longer provide sufficient availability.

For owners and management teams, understanding whether the problem lies in operating performance or the underlying financing structure is an important first step.

Why profitable growth can create cash flow pressure

Consider a manufacturer that secures a significant new customer program.

The contract creates an opportunity to increase production and generate additional revenue, but fulfilling it requires the business to purchase more materials, increase inventory and potentially expand its workforce.

Those expenses occur before the corresponding revenue is collected.

Even where the contract is profitable, the business may need to finance several months of additional operating costs before converting those sales into cash.

This creates a growing gap between cash leaving the business and cash returning through customer payments.

When that gap exceeds the availability under the company’s existing credit facility, management may find itself facing liquidity constraints despite reporting positive earnings.

The income statement may suggest the business is performing well, while the balance sheet and cash flow statement reveal increasing pressure on its financing arrangements.

Recognizing when a credit facility has been outgrown

A revolving line of credit is generally intended to support the ongoing movement of cash through a business.

For manufacturers, this often means funding inventory and receivables as they move through the production and collection cycle.

However, a facility established several years earlier may have been structured around a significantly smaller business.

As production volumes, customer requirements and working capital needs change, the original facility may become increasingly restrictive.

Common indicators include:

• A revolving line that remains fully drawn for extended periods.

• Increasing reliance on supplier payment terms to preserve liquidity.

• Limited borrowing availability despite growth in revenue and assets.

• Difficulty funding new customer programs or inventory requirements.

• Equipment purchases consuming cash intended for daily operations.

• Frequent requests for temporary increases or exceptions from the lender.

Individually, these circumstances do not necessarily indicate financial distress.

Collectively, they may suggest that the business’s financing arrangements no longer reflect its operating requirements.

What businesses should consider before seeking additional financing

1. Understand the underlying cash conversion cycle

Before increasing borrowing capacity, management should understand where cash is being consumed.

How long does inventory remain in production? How quickly are customers paying? Are payment terms changing as larger customers become a greater proportion of revenue?

Examining the relationship between inventory, receivables and payables helps establish how much capital the business actually needs to support its current operations and anticipated growth.

This analysis also helps distinguish a structural financing shortfall from operational inefficiencies that additional debt alone would not resolve.

2. Match financing availability to the assets supporting growth

For businesses with substantial receivables and inventory, an asset-based lending structure may provide an alternative to a conventional fixed-limit revolving facility.

Rather than relying solely on a predetermined credit limit, borrowing availability can be tied to eligible assets through an agreed borrowing base.

As qualifying receivables and inventory increase, the amount available to borrow may increase within the facility’s terms and limits.

This can provide greater flexibility for manufacturers experiencing changes in production volumes and working capital requirements.

However, eligibility criteria, customer concentration, inventory valuations and other borrowing-base restrictions must be evaluated carefully.

3. Avoid using working capital to finance long-term investments

Another common source of liquidity pressure arises when businesses use their revolving credit facilities or cash reserves to purchase equipment.

While these investments may improve productivity and support future growth, they can place immediate pressure on capital required for payroll, materials and other operating expenses.

Equipment financing, term debt or leasing arrangements may allow a company to spread the cost of those investments over a period more closely aligned with their productive life.

Separating longer-term capital expenditure from day-to-day working capital requirements can create a more sustainable financing structure.

4. Address financing constraints before they become urgent

Businesses generally have more options when they begin evaluating their financing arrangements before liquidity becomes critically constrained.

Waiting until a borrowing limit has been reached, a covenant has been breached or a major customer program is already underway can reduce the time available to evaluate lenders and negotiate suitable terms.

An earlier review gives management an opportunity to assess projected requirements, prepare financial information and identify financing structures capable of supporting the next stage of growth.

How Glengarry Capital Group helps

Glengarry Capital Group works with privately held lower-middle-market and middle-market businesses, with particular emphasis on manufacturing, to evaluate and arrange financing appropriate to their operating needs and growth objectives.

For companies experiencing working capital constraints, this begins with understanding the underlying business, including its cash conversion cycle, existing lending arrangements, asset base and anticipated capital requirements.

From there, Glengarry evaluates potential financing structures, identifies suitable lenders and manages the process of securing capital aligned with the company’s financial position and objectives.

Solutions may include asset-based revolving facilities, equipment financing and other structured credit arrangements, depending on the circumstances.

The objective is to establish a financing structure that supports the business as it grows, while preserving the liquidity required to operate effectively.

Is your existing credit facility supporting your next stage of growth?

If your business is experiencing increasing working capital pressure despite healthy sales, it may be worth reviewing whether your existing financing arrangements remain appropriate.

Contact Tom Kessel, Principal at Glengarry Capital Group, to discuss your company’s financing requirements and available options.