WHAT'S IN THIS GUIDE
Doing business in the manufacturing industry comes with many costs. Cash flow can easily become an issue for many manufacturers as they buy equipment, materials, and supplies, make payroll, fund the cost of production before being paid for a product, and work to grow their businesses. Keeping ahead of any cash flow issues is why so many business owners turn to manufacturing invoice factoring solutions.
Manufacturing invoice factoring, aka accounts receivable factoring, can provide the much-needed capital you need to cover operating costs and grow your business while waiting on net payment terms from your customers. But just how exactly does factoring for manufacturing companies work, and how do you know if it’s right for your manufacturing business? This guide has you covered with everything you need to know about factoring services for manufacturing.
Manufacturing invoice factoring is a financial arrangement that allows manufacturing companies to access immediate cash flow by selling their accounts receivable (invoices) to a third-party company, known as a factor.
In the manufacturing industry, companies often face cash flow challenges due to the time gap between completing a product or service and receiving payment from their customers. This gap can be particularly long in manufacturing, as it involves various stages such as production, shipping, and distribution.
Invoice factoring with manufacturing factoring companies helps address this cash flow gap by providing an immediate infusion of funds.
It doesn’t matter if you manufacture electronics, plastics, furniture, coffee cups, pet food, can openers, or any other product. Problems with cash flow can interrupt your business and stop business growth in its tracks. Accounts receivable factoring for manufacturing companies gives you fast access to the capital you’ve already earned via your outstanding receivables.
Here’s how factoring for a manufacturing company typically works:
Manufacturer factoring offers several advantages to manufacturing companies. Here are some of the key benefits of manufacturing factoring:
1. Improved Cash Flow: One of the primary benefits of invoice factoring services is the immediate infusion of cash it provides. Rather than waiting for customers to pay their invoices, you can access funding for the invoice value upfront. This helps bridge the cash flow gap and provides funds to cover operational expenses, such as raw materials, payroll, and other immediate financial obligations.
2. Quick and Easy Access to Funds: Manufacturer invoice factoring is typically a fast and straightforward process compared to traditional financing options like bank loans. Once you have an established relationship with a factoring company, subsequent funding can be obtained quickly, often within a couple of business days. This rapid access to funds can be vital for manufacturers who need to seize business opportunities, fulfill orders, or address unexpected expenses promptly.
3. No Debt Incurred: Unlike a loan, invoice factoring does not create debt. It is not a form of borrowing, but rather a sale of accounts receivable. This means that your business is not taking on additional financial liability or burdening its balance sheet with debt. Manufacturer invoice factoring can be a useful option for companies that want to avoid traditional debt financing, or that do not qualify for traditional bank loans.
4. Flexible Financing Option: Invoice factoring provides flexibility. The funding amount is based on the value of the invoices, allowing your business to access funds in proportion to your sales volume. As your company grows and generates more invoices, the available funding can increase accordingly. This scalability makes invoice factoring an adaptable financing solution that can support the changing needs of your business.
5. Outsourced Accounts Receivable Management: When invoices are factored, the factoring companies for manufacturing take over the responsibility of collecting payments from customers. This relieves you of the administrative tasks and costs associated with accounts receivable management, such as invoicing, tracking payments, and collections. By outsourcing these functions to the factoring company, you can focus on your core competencies and save time and resources. (If this concerns you, see how we work with your customers.)
It’s important to note that while the manufacturing invoice factoring process offers numerous benefits, each company’s situation is unique. Be sure to carefully evaluate the costs, terms, and reputation of the factoring company before entering into a factoring agreement to ensure it aligns with your specific financial needs and goals.
Choosing a manufacturing invoice factoring company is a lot like choosing any lender: you have to know which questions to ask and evaluate the answers in the context of your situation. Here’s what we recommend asking:
Most factoring companies work with most industries, but not all. Some factors specialize in only a few industries.
FundThrough works with manufacturers.
The advance rate is the portion of your invoice that the factor gives you immediately; they hold the rest until the invoice is paid and then forward you the remaining balance minus their fee. Advance rates can range from 60% to 100%, depending on the factoring company and sometimes the industry.
FundThrough advances 100% of the invoice amount, less a fee.
A factoring company should be able to provide what factoring fees it charges upfront. This can include both the discount rate – the percentage the factor keeps as their main fee – and hidden fees, such as maintenance fees. A low advance rate could mean that you’ll face multiple hidden fees, so it makes sense to ask any factor you’re considering to explain their fee structure including the total cost of factoring invoices.
See FundThrough’s pricing here. We don’t charge any hidden fees.
A minimum is the amount you must factor every period (every month, quarter, or year) or a requirement to fund all invoices to a customer. Some factoring companies offer plans that require minimums, while others do not.
FundThrough doesn’t require minimums. Only fund when you need to.
When evaluating financing options for your business, it’s important to consider various factors to determine the best fit. To help you make an informed decision and select the one that best meets your business needs, we’ve broken down the pros and cons of some of the most popular manufacturing financing options.
A line of credit (LOC) is a lot like a credit card. You can withdraw money up to a certain maximum amount determined by your financial institution. You can cover day-to-day expenses and pay back your debt, only to borrow again when needed.
Like all forms of funding, business credit cards can be helpful in the right situations.
Account receivable factoring for manufacturing is not a loan. The application process is quick. There is no repayment obligation as long as your customer pays their invoice, no high interest rates, and no debt to record on your company’s balance sheet. Plus, many more companies will qualify for factoring for manufacturers.
Cash flow is the number one problem for most start-ups and small businesses, especially if they’re growing. This is also true for manufacturing companies. Invoice factoring companies typically consider several situations before offering you an advance.
Factoring invoices is a sound financial strategy if you:
Invoice finance for manufacturers is a financial solution that enables manufacturing companies to access working capital by using their unpaid invoices as collateral. It’s another term for invoice factoring. With invoice factoring for manufacturers, manufacturing companies sell their invoices to a factoring company at a discounted rate in exchange for a cash advance on the value of the invoice.
Invoice financing for manufacturers works by using unpaid invoices as collateral to access immediate cash flow. You submit your outstanding invoices to a factoring company, who gives you an advance on the value of your unpaid invoice. You put your money to work immediately, while the factoring company works with your customer to settle the invoice according to the original payment terms.
Interested in possibly embedding FundThrough in your platform? Let’s connect!