Published in Manufacturing

As lenders rush to deploy capital, manufacturers opt for balance

BY Sunday, January 10, 2016 10:17pm

Spurred on by increased demand for its industrial welding equipment, Wyoming-based RoMan Manufacturing Inc. needed to expand.

Luckily, the company had several options at its disposal to fund that growth, according to President and CEO Bob Roth.

To begin with, Roth didn’t need to approach a bank at all and could have funded the $3 million expansion project solely from excess cash on the company’s balance sheet, but doing so would limit RoMan’s ability to navigate potential downturns in the coming years.

Since the cost of debt remains near historical lows, Roth also could have easily secured long-term debt to cover the expansion and paid down a large loan over time.

Instead of choosing solely from either source of capital, the company opted for a balanced approach. To pay for the 15,000-square-foot high-bay expansion and 9,000-square-foot office renovation, RoMan Manufacturing self-funded two-thirds of the project and took on traditional long-term debt from Comerica Bank to cover the remainder of the cost.

“We could have paid for the whole thing ourselves,” Roth said. “But then if we in the near future went through a cycle where we needed additional cash flow, now you’re going to the bank where you’re in a weaker position because you need the money and it’s short-term financing.

“I’m of the mind that you pair a long-term project with long-term debt, instead of pairing a long-term project with short-term debt.”

Roth’s decision to strike a balance between debt and self-financing underscores the nuanced atmosphere of commercial lending in West Michigan that has changed the way manufacturers borrow, sources said.

Like RoMan, many West Michigan manufacturers are opting to partially or fully self-fund expansion projects that would normally have fallen under the purview of bank debt, industry sources said. That trend — combined with added pressure on banks to perform for shareholders — has yielded a competitive commercial lending market with more incentives and looser terms that manufacturers have capitalized on to grow their businesses.

Confidence among manufacturers to take on debt has grown steadily since the recession years, said Ray Reitsema, West Michigan president and senior lending officer at Mercantile Bank of Michigan.

After a period of limited borrowing immediately following the recession, manufacturers began incurring debt only when necessary to relieve capacity constraints, Reitsema said.

“Now we’ve moved beyond those situations where you obviously have to (take on debt), to situations now where manufacturers are willing to undertake debt to do things strategically like (make) an acquisition or get some more capacity or support their inventory needs,” Reitsema said.  

But as the RoMan case shows, not all manufacturers are willing to finance an entire project with traditional bank debt, a point not lost on Reitsema.

“I’d also say that they need us less,” Reitsema said. “The balance sheets are stronger in general than they were five years ago, so their willingness to entertain borrowing more is greater, but their capacity to fund their own needs is greater, too.”

That trend combined with increasing competition among commercial lenders has resulted in larger lines of credit and more flexible terms than in the past, sources said.

“It’s a different story now than back in 2008 and 2009 when banks were pitching clients like sandbags off a balloon,” Roth said.


The present environment has led to heightened competition among commercial lenders.

“The market in Grand Rapids is fiercely competitive right now,” said Joel Brandt, vice president of commercial banking at Holland-based Macatawa Bank Corp.

That competition among commercial lenders has resulted in more flexible terms and incentives, as well as lower prices from institutions than in the past, he said, noting that banks remain flush with capital right now.

“As an industry in general, including in Grand Rapids, we’ve seen requirements loosen over the last 24 months,” Brandt said. “Nearly every bank in the market right now is in a situation where they are highly capitalized and (trying) to drive shareholder returns.”

“The best way to deploy that excess capital is through commercial lending (and) that is driving demand for loans at every bank,” Brandt added, noting that banks also face competition from credit unions, which are making more inroads in courting manufacturers.

In RoMan Manufacturing’s case, Comerica raised the company’s line of credit following the expansion without executives having to ask for it — a move Roth attributes to increased competition in the commercial banking sector.

“I think it was a bit of a pre-emptive strike,” Roth said. “They probably looked at it and said, ‘There’s not a lot of risk and this can make them feel good.’ It was a pretty savvy move on their part to suggest they could add more on the line without us having to beg them for it. I think like in most businesses, it’s less expensive to keep a customer than to get a new customer.”


While banking executives interviewed for this report say manufacturers’ use of capital and financing varies across the board, most noted that facility expansions and purchasing new real estate appear to be the standouts in the current market.

“We’ve seen more of a situation where a company has growing sales and may have grown outside of what a space provides and they’re looking for plant expansions,” said John Porterfield, regional president of Comerica in Grand Rapids.

Porterfield has also witnessed manufacturers tapping into their lines of credit less over the past year due to plunging commodity prices, he said.

“Whether it’s steel, plastic resins or whatever, a lot of those commodity prices have fallen particularly this year and in recent months,” Porterfield said. “We’re not seeing as much borrowing on revolving lines of credit to support inventory as product is being manufactured, primarily because raw material costs have gone down.”  

Manufacturers are also paying down those lines of credit faster than in the past as a result of the excess cash on their balance sheets, Porterfield said.

Some companies, such as Bridgman-based Great Lakes Metal Stamping Inc., have taken advantage of the positive lending climate to fund working capital needs. The manufacturer of steel and aluminum stampings for the automotive, agricultural and appliance markets recently secured an $8 million senior credit facility from MB Business Capital, a division of Chicago-based MB Financial Bank North America.

Great Lakes Stamping plans to use the senior credit facility to fund working capital needs to support its growing manufacturing facility in Alabama, said Matt Miller, managing director at Grand Rapids-based consulting firm BlueWater Partners LLC, which assisted Great Lakes Stamping on the recapitalization.

“It was a good time to go to market and look at alternatives,” Miller said. “As we’ve seen for several years since the recession, banks are lending, they’ve been aggressive, interest rates are low and banks are eager to invest in good companies.”


Economists and other analysts predict the economy is approaching the peak of the expansion. As such, they’re beginning to prepare for the next downturn to occur and brace for how much that will impact business.

While North American light vehicle production is slated to peak at 19 million units in 2021 according to data from IHS Automotive, other industries such as industrial equipment and oil and gas have already reached the top of the cycle, Roth said. As each respective industry plateaus, the commercial lending market could tighten, though not as much as during the last recession, he added.

Experts also predict there will be little impact on lending from the recent quarter-point interest rate hike by the Federal Reserve in mid-December. Likewise, future interest rate increases will likely have a minimum effect on businesses, Reitsema said.

“I think it’s being viewed as almost a nonevent at this point,” Reitsema said. “It’s been anticipated for so long and the proportions are so modest and offset that it’s not a factor in a company’s planning.”

Roth predicts that any future increases to the federal interest rate will “be a long, slow road” as inflation continues to be held down by depressed oil prices.

Overall, bankers predict the commercial lending sector will remain robust in the near term, barring any catastrophic global events. They also see manufacturers continuing to strike a balance between deploying the cash on their balance sheets and taking on debt.

“I think the biggest story is that the confidence is growing and the willingness to borrow is there,” Reitsema said. “Companies are generally strong enough that their ability to self-finance is better than ever.”

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