How does Invoice Factoring work for a Manufacturing Company?

The manufacturing industry is one of the most vital industries that require huge business capital. To stay competitive in the market, satisfy clients, and offer quality services, manufacturing companies often need to offer long-term payment plans. Manufacturers have a wide range of expenses that include purchasing raw materials and equipment, paying contractors and employees, renting warehouses- to name a few. For all these reasons, factoring for manufacturing makes a great solution. Opting for manufacturing invoice factoring services allows all the manufacturing companies to maintain a healthy cash-flow balance and grow their business with ease.

About Manufacturing Invoice Factoring

Factoring is a service that allows businesses to receive immediate business capital based on their future income through invoices. When B2B business partners with a factoring company or a factor, the company can sell its outstanding invoices in exchange for advance cash. As a result, the company can fulfill orders and provide services without any worry about future expenses. When the company receives payments from the clients, they need to pay a specific amount to the factoring company along with the advance cash they received from the factor.

Invoice factoring for manufacturing is a finance plan that a factoring company offers exclusively to manufacturing companies. It allows the manufacturers to cover huge business expenses. In the manufacturing industry, it is common to offer long payment terms that can range from 30 to 120 days. In such cases, instead of taking a business loan, the manufacturers can opt for invoice factoring services. As a manufacturer makes a partnership with a factoring company, they get instant finance based on the value of the invoices. In this context, one should consider that invoice financing is a different service from invoice factoring. Here are the main differences:

• Invoice financing does not buy invoices whereas invoice factoring does.
• Invoice factoring is more expensive and conventional than invoice financing.
• Invoice financing does not include any maintenance fees whereas invoice factoring may include.

About Manufacturing Invoice Financing

Manufacturing invoice financing can be an alternative plan for manufacturers who do not want to opt for invoice factoring. Invoice financing can resolve low cash flow and working capital issues just as invoice factoring. However, the main difference lies in their strategy. Invoice financing gives manufacturers access to cash by advancing funds based on invoices. Financing companies usually have many tools to determine the client’s reliability without a credit check. As the manufacturers do not have to sell invoices, they get complete control of their collection services. Manufacturing invoice financing companies also claim that the process of getting approved for financing is shorter than factoring for manufacturing. Additionally, they follow an electronic payment process to ensure faster payment.

How Manufacturing Invoice Factoring Works:

The process of manufacturing invoice factoring is simple. It may begin when a manufacturing company sells its products or services to its customers or clients. Manufacturing companies should prepare invoices due in 30 to 120 days. The next step is contacting a factor and creating an account with the factor. Then, the manufacturing company should present its outstanding invoices to factor. Based on the agreed percentage (invoice value), the factor provides advance cash immediately. When the customers or clients pay the company within the deadline, the payment is deposited into the temporary reserve account. As the factoring company has access to the account, the factor deducts the fees and amount advanced in the final step. To complete the process, the factoring company sends the remaining balance to the manufacturing company.

Here is an example:

ABC manufacturing company partners with a factoring company and shows an invoice for $1,000. The factoring company agrees to pay an 80% advance rate and a 2% factoring fee. When the customers pay ABC company its payments, the factor is supposed to deduct $20 as a factoring fee and $800 as the advanced fund. ABC company finally should receive the remaining balance of $180 from the factor.

Conclusion:

Services like factoring for manufacturing have made running manufacturing businesses easier for start-ups and small brands. There are multiple advantages associated with this service, which are discussed above. However, one should always read the contract carefully and look for a lower factoring rate before partnering with a factoring company.