Ways to Raise Capital for Your Manufacturing Business
Ways manufacturers raise capital: bank lines, ABL, equipment finance, SBA 7(a) and 504, mezzanine debt, private equity and sale-leasebacks, compared.
Nauman Poonja, CPA · Updated · 8 min read · Editorial standards 
Established manufacturers raise capital for different reasons than startups do. You're not funding an idea. You're funding a machine, a building, a bigger contract, an acquisition, or the cash gap that comes with growth.
That changes which sources make sense. For a $3M to $30M manufacturer, the usual starting mix is retained profit, bank debt and asset-backed financing. Equity comes in later, usually for a larger move or an ownership change. Here are the main options, what each one costs you, and what the other side will want to see.
This is general information, not legal or tax advice. Work with your CPA and attorney before you sign anything.
Why would a manufacturer need to raise capital?
The common reasons are predictable. A large new customer needs more inventory and receivables than your line can support. Equipment is aging or capacity is maxed out. You want to buy the building you lease, or build a new one. A competitor or supplier is for sale. Or a partner wants out.
Each of those has a different time horizon. That matters, because the funding should match the use. Short-term needs should use short-term money. Long-lived assets should use long-term money.
One pattern to avoid is using the line of credit to buy equipment. The line fills up, and then there's nothing left when receivables spike.
Can you fund growth from profits?
For an established company, this is the cheapest capital you have. It's the old idea of bootstrapping, just applied to a business that already makes money.
The limit is speed. If you earn $1M a year after tax distributions and owner pay, that's what you can reinvest. Growth that needs more than that, or needs it faster, needs outside money.
The other trade-off is concentration. Every dollar reinvested is a dollar that stays at risk in one business. Some owners want to take some off the table first. That's a reasonable choice.
How does a bank line of credit work?
A revolving line of credit is the standard tool for the cash swings of manufacturing: buying material before you get paid, covering a slow month, carrying a large order.
Lines for manufacturers are often tied to a borrowing base, meaning the amount you can borrow is a percentage of your eligible receivables and inventory. The bank also sets covenants, like a minimum debt service coverage ratio, and asks for regular financial reporting.
What the bank wants: timely monthly financials, accurate receivables and inventory reports, and a forecast that shows how the line gets used and paid down. Our post on securing manufacturing bank financing goes deeper on the bank conversation.
What is asset-based lending?
Asset-based lending, or ABL, is a line of credit that leans more heavily on your collateral than on your earnings. It's common for manufacturers with large receivables and inventory, uneven earnings, or fast growth.
Here's an illustrative borrowing base. Advance rates vary by lender and by the quality of your collateral, so treat these percentages as examples only.
| Collateral | Eligible amount | Advance rate | Borrowing base |
|---|---|---|---|
| Receivables | $2,000,000 | 80% | $1,600,000 |
| Inventory | $1,500,000 | 50% | $750,000 |
| Total | $2,350,000 | ||
| Less current loan balance | -$1,400,000 | ||
| Available to borrow | $950,000 |
The trade-off is reporting. ABL lenders often want borrowing base certificates monthly or more often, plus field exams and inventory appraisals. If your inventory records are weak, the lender will discount them heavily or exclude them.
How should you finance equipment?
Equipment loans and leases let you pay for a machine over the years it produces. The machine itself is the collateral, which often makes approval easier than a general loan.
Try to match the term to the useful life. A five-year loan on a machine you'll run for fifteen years is fine if cash allows. A seven-year loan on a machine you'll replace in four is not.
There's a tax angle too. Under current law, 100% bonus depreciation is permanent for qualifying property acquired after January 19, 2025, and the Section 179 limit for 2026 is $2,560,000. Financing a machine doesn't stop you from deducting it, so a large deduction can arrive in a year when you've paid only a few loan payments. Lease structure can change who gets the deduction. Your CPA should weigh in before you sign.
For the lease versus buy math, see our equipment lease vs. buy analysis.
What do SBA 7(a) and 504 loans offer manufacturers?
SBA loans are made by banks and other lenders, with part of the loan guaranteed by the Small Business Administration. The guarantee lets lenders offer longer terms or lower down payments than they might otherwise. You must qualify as a small business under SBA size standards.
The 7(a) program is SBA's main general-purpose loan. SBA's page lists a maximum loan amount of $5 million. SBA lists uses that include operating cash needs, equipment and machinery, real estate, refinancing business debt and ownership changes.
The 504 program is for fixed assets: buying, building or renovating real estate, and long-term machinery with at least ten years of remaining useful life. It can't be used for working capital or inventory. A bank loan sits alongside the SBA-backed portion, so the total project can be larger than the SBA cap. SBA's page lists $5.5 million as the maximum for the 504 loan, though it also mentions $5 million in other places, so confirm the current figure with the lender.
One more note. Congress has considered raising these limits to $10 million for manufacturers. The House passed that bill in December 2025. When we checked in November 2026, SBA's program pages still showed the limits above, so confirm the current rules before you plan around a higher number.
What is mezzanine or subordinated debt?
Mezzanine debt sits behind the bank. If things go wrong, the bank gets paid first. Because of that extra risk, mezzanine lenders charge a higher rate, and some ask for warrants, a small right to buy equity later.
It's often used for acquisitions, recapitalizations, or growth that's too big for the bank but where the owner doesn't want to sell equity. It costs more than bank debt and usually less ownership than a private equity deal.
The bank will need to agree to it, usually through an intercreditor agreement that sets who gets paid when. Read the covenants carefully. You now have two lenders testing your numbers.
When does private equity make sense?
Private equity firms buy majority or minority stakes in private companies. For a manufacturer, that usually happens when the owner wants to take money off the table, wants a partner to fund a larger growth plan or acquisitions, or is planning for succession.
The trade-off is control. Even a minority investor will ask for board seats, approval rights over big decisions, and regular reporting. A majority investor runs the plan.
Expect deep diligence, including a quality of earnings review. If you're heading this way, our post on GAAP vs non-GAAP before talking to lenders covers how buyers will test your earnings. Family offices and strategic buyers, like a larger company in your industry, are other options with different expectations.
What is a sale-leaseback?
If you own your building, you can sell it to an investor and lease it back. You keep using the space. The cash that was tied up in real estate goes back into the operating business.
It can make sense when you need capital for growth and don't want more debt or a partner. The cost is rent for the life of the lease, and you give up any future gain on the property. There are also tax effects from the sale. Talk to your CPA first.
Equipment sale-leasebacks exist too. They work similarly, though terms and costs vary a lot.
Are there other sources worth knowing?
A few more are worth a look in the right situation.
Customer deposits and progress billing on large or custom orders. This is often the cheapest money you'll find, and many industrial customers expect it. Longer vendor terms on material for a large order. State and local economic development incentives for expansions or new hiring, which vary by location.
Crowdfunding and angel investors come up in startup advice. For an established manufacturer, they're rarely a good fit, and I'd look at the options above first.
How do the options compare?
| Source | Best for | What it costs you | What they want to see |
|---|---|---|---|
| Retained profit | Steady growth | Slower growth, owner risk | Nothing outside |
| Bank line of credit | Cash swings, working needs | Interest, covenants | Monthly financials, borrowing base |
| ABL | Collateral-heavy, uneven earnings | Interest, fees, heavy reporting | Accurate receivables and inventory |
| Equipment finance | Machines | Interest, lien on asset | Quote, financials |
| SBA 7(a) / 504 | Real estate, equipment, broader needs (7(a)) | Fees, guarantees, paperwork | Eligibility, financials, personal guarantee |
| Mezzanine | Acquisitions, recaps | Higher rate, possibly warrants | Strong earnings history |
| Private equity | Big growth, liquidity, succession | Ownership and control | Quality of earnings, growth plan |
| Sale-leaseback | Freeing real estate cash | Rent, lost appreciation | Property value, lease credit |
How should you prepare before you ask?
Whatever the source, the preparation is similar. Lenders and investors want to see that you know your numbers and have a plan for their money.
- Clean, accrual-basis monthly financials, closed on time.
- Three years of history and the trailing twelve months.
- A forecast that shows how the money is used and how it gets repaid, including a 13-week cash flow for the near term.
- Accurate receivables aging and inventory reports.
- A short explanation of any unusual years or one-time items.
Our capital planning work covers the forecast and the lender package, and our fractional CFO team can sit in on the lender or investor meetings with you.
Frequently Asked Questions
How do established manufacturers usually fund growth?
Often with retained profit plus bank debt, usually a line of credit for working needs and equipment loans for machines. Equity tends to come later, for larger moves.
What is the difference between a line of credit and ABL?
Both are revolving loans. ABL relies more on your receivables and inventory as collateral and usually comes with heavier reporting.
Can an SBA 504 loan be used for working capital?
No. SBA's 504 page excludes working capital and inventory. It's for real estate and long-term machinery and equipment.
Should I use my line of credit to buy equipment?
Usually not. Use equipment financing matched to the machine's life, and keep the line available for receivables and inventory swings.
What do lenders want before approving a loan?
Timely, accurate financials, a clear use of funds, and a believable plan to repay. Clean receivables and inventory reports matter a lot for manufacturers.
More on: Capital Planning & Financing · Fractional CFO
