Manufacturing Factoring

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In this article:

• What is manufacturing factoring?
• How does invoice factoring work for manufacturing companies?
• What are the main types of factoring for manufacturing companies?
• What are the benefits of invoice factoring for manufacturers?
• Considerations when choosing a factoring partner
• Conclusion

What is manufacturing factoring?

Manufacturing factoring allows manufacturers to unlock cash tied up in unpaid invoices. Instead of waiting 30, 60, or even 90 days for customers to pay, manufacturers can sell their invoices to a factoring company in exchange for an immediate cash advance. This effectively provides your business with a working capital loan, to cover operational costs such as purchasing raw materials, paying suppliers, and managing payroll, helping businesses maintain production schedules and take on new orders without cash flow interruptions.

Unlike traditional loans, manufacturing factoring does not add debt to the balance sheet, making it an accessible and flexible funding option.

How does invoice factoring work for manufacturing companies?

The process typically involves the following steps:

1. Service or product delivery: The manufacturer delivers goods or services to the customer and issues an invoice with specific payment terms.
2. Selling invoices: Instead of waiting for the payment period to elapse, the manufacturer sells the invoice to a factoring company at a discount.
3. Receiving advance: The factor provides an upfront advance, usually between 70% to 90% of the invoice value.
4. Customer payment: The customer pays the invoice amount directly to the factoring company.
5. Final settlement: Once the factor receives the full payment, the remaining balance, minus factoring fees, is remitted to the manufacturer.

What are the main types of factoring for manufacturing companies?

• Recourse factoring: The manufacturer retains the risk of customer non-payment, meaning they may need to repurchase the invoice if the customer defaults.
• Non-recourse factoring: The factoring company assumes the risk of non-payment, providing the manufacturer with protection against customer insolvency, often at a higher fee.

What are the benefits of invoice factoring for manufacturers?

• Improved cash flow: Immediate access to funds enables timely payment of suppliers and employees.
• Flexible financing: Funding scales with sales; as invoice volumes increase, available financing grows accordingly.
• Credit control and credit management support: Factoring companies often provide credit assessment services, helping manufacturers evaluate customer creditworthiness.
• No additional debt: Since factoring is not a loan, it doesn't add to the company’s liabilities.

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Considerations when choosing a factoring partner

• Cost structure: Understand all fees involved, including discount rates and any additional charges.
• Contract terms: Review the length of the agreement and any minimum volume requirements.
• Customer interaction: Determine how the factor interacts with your customers, as this can impact relationships.
• Reputation and experience: Choose a factor with experience in the manufacturing sector and a solid reputation.

Conclusion

Manufacturing factoring can be a valuable financial tool for companies looking to maintain steady cash flow while keeping production lines running smoothly. By understanding the factoring process and carefully selecting a factoring partner, manufacturers can enhance their financial stability and focus on growth opportunities.