Manufacturing Businesses Pair Well with Factoring Receivables
The manufacturing industry has an eons-long history of partnering with invoice factoring companies to obtain financing for their business growth. The very nature of the manufacturing business lends itself well to this flexible and adaptable funding method. And while many new businesses and industries are just dipping their toes into the accounts receivable financing space, manufacturing (both international and domestic) have been relying on manufacturing financing since the 1300s and even earlier.
In order to produce a finished product to be manufactured, distributed and sold, most manufactures or suppliers must make a considerable investment on the front end in sourcing and purchasing raw materials, leasing factory or production space, buying large equipment and gear, and hiring employees. That’s just the start of it. Manufacturing businesses must make these investments at the very start, oftentimes before they have collected on payment received from actually selling the finished good or product they are producing.
Why Is Manufacturing Such a Great Fit for Factoring Receivables?
Moreover, manufacturers only receive a share of profit from the goods they produce. Middlemen, such as distributors and wholesalers, move the manufactured goods to the retail market to be sold. These individuals take their cut and the final retailer or merchant takes their percentage for selling the product on their shelves. At the end of the production-to-sales cycle, the manufacturer can often find itself running on fairly slim margins.
At its very essence, account receivables financing is about advancing capital to help businesses on the front end rather than waiting for payment on the backend. With invoice factoring, a manufacturing company can get the up-front capital it needs before it has actually collected on money owed to them. Provided they have a valid invoice to a customer of good financial standing (solid FICO score) the manufacturing company can collect an advance on their invoice by using invoice factoring services.
Capital from Manufacturing Financing Allows Your Company to:
- Purchase raw materials in bulk often at a discount to control costs
- Hire new workers or cover the costs of payroll, benefits, or other employment expenses.
- Lease more modern or technologically advanced manufacturing equipment to increase production capabilities or output.
- Ramp up production to meet an unexpected increase in product demand
- Improve cash flow and strengthening your overall business operations and robustness
Seasonal Manufacturing Businesses Rely on Factoring Receivables
From toys and athletic gear to summer wear and accessories, many companies in the manufacturing sector are seasonal. This means they are slow for many months of the year and generate most of their business during only a few months. Seasonal trades often suffer from poor cash flow as these vast fluctuations in business can make it difficult to plan or make meaningful financial projections. Seasonal businesses can also suffer from insufficient working capital. Invoice factoring can offer tremendous support to these manufacturing seasonal businesses so they strengthen their cash flow and working capital.
By offering an advance on your invoice, you can collect on your payment sooner and avoid payment gaps. With invoice factoring, you will know precisely when you will get paid. This means your business plans and financial forecasting will be more accurate so cash flow disparities will be significantly reduced. Without account receivables financing, you are left to wonder when payment will be remitted and this makes planning speculative. This is particularly true with overseas manufacturers who may also work with their own timelines and schedules.
Invoice Factoring Is a Must When Slow to Pay is the Norm for Suppliers
Factoring receivables also benefits manufacturers or suppliers who manufacture goods to large corporate entities. Though it may sound somewhat inequitable, it is oftentimes the largest, most cash-rich corporate firms that take the longest to pay their smaller, cash-poor suppliers. How did this mismatch occur? Basically large corporate enterprises recognize their power in the supplier-customer relationship and are able to leverage it to make the most of the traditional 30-days to pay window. Today, it is not uncommon for some large corporations to remit payment in 60 or even 90-days.
As such very few manufacturers or suppliers can sustain that size payment gap without outside funding. Factoring companies, particularly those that specialize in manufacturing and distribution, are familiar with this misalignment between small suppliers and large corporations. They will work with manufacturers and suppliers to set up payment agreement and terms so that you collect payment in a matter of days even though your customer may take months to pay.
Though such payment timelines will generally cost more, invoice factoring costs and percentages are based on the amount of time it takes for the client to remit payment, working with a manufacturing factoring company to obtain capital for your business is likely your best option.
Flexibility of Factoring Receivables Helps Manufacturing
Another reason why many in manufacturing prefer invoice factoring to other commercial financing options is flexibility. Many established factoring companies offer an ever-expanding (or retracting) line of credit based on the volume of your business. This is not the same for a business loan, which stays the same even if your business needs change.
So for instance, let’s say this month your business partners with an invoice factoring company to process your total accounts receivables for approximately $25,000. Next month, let’s say your business quadruples and now you now need to factor a volume of $100,000 of accounts receivables. Chances are, if you’ve partnered with a reputable factoring company, they can effortlessly process this higher volume amount. Flexibility and the ability to grow as your business grows are some other reasons invoice factoring works so well with manufacturing.
If you take this same situation and apply it to a banking situation, the outcome is very different. So you need $25,000 one month but then need $100,000 the next month, you have to reapply for the business loan. This is a very long and tedious process, something fast growing manufacturing businesses often don’t have the time for.
In summary, manufacturing businesses often partner well with accounts receivable financing companies because they tend to need capital infusion on the front end, they tend to be seasonal and therefore more prone to cash flow issues, they have long payment periods (exceeding the usual 30-day payment window) and they are flexible and adaptable to your changing business needs.