Many manufacturing companies that survived the recession have gone through a very challenging period. Many faced immediate cash flow problems because they had clients who where extending payment dates, and suppliers that where demanding faster payments. This tug of war for cash flow worked itself across the whole supply chain of manufacturing companies, often wreaking havoc. Many of this problems persist to this day and are now becoming industry practices.
Survival of the fittest?
One way to handle this situation was to tap the company’s financial reserves – if you have them. Manufacturing companies can also resort to offering quick payment discount to clients, while at the same time paying suppliers slowly. For many companies, the best solution is to use business financing, in combination with cash conservation techniques. This enables them to manage their finances in a more efficient way.
The problem with conventional business financing – and lines of credit – is that they are very hard to get. Lending institutions will only provide funding to companies that have assets that can be pledged as collateral, solid financial statements and a good track record. However, if your main problem is simply slow paying clients, there is another solution that could replace a line of credit.
Financing your invoices – improve your cash flow
You can easily solve the cash flow problems created by slow paying customers by financing your receivables. Factoring allows manufacturing companies to offer terms to clients without having to worry about slow paying customers. It works by partnering with a financial intermediary. They fund your invoices which provides you with immediate liquidity.
Receivables are often financed in two installments. The first installment often covers about 80% of the receivable and is funded as soon as the product for the invoice has been delivered. The second installment is provided once your client pays in full. It covers the remaining 20%, less the financing fee.
Recourse and Non Recourse Options
Factoring financing comes in two modalities – recourse and non recourse factoring. The main difference between both solutions is what happens to your company if your clients does not pay the invoice. On a recourse agreement, you must make the factor whole. In a non-recourse agreement, you will not need to make the factor whole if your client did not pay due to a declared insolvency – and – if the insolvency happened during the 90 days factoring period. For most people, these differences should not be very important. In general, invoice financing companies are very good at determining the probability of default and will seldom finance a risky invoice. Most factors will outline their program in their contract documents and you should retain a competent attorney to review them for you.
Advantages of the solution
The main benefit of factoring is that the financing line is flexible, because it’s tied to your invoices. This means that your funding can dynamically increase to match your sales as long as your customers and your company meet the funding requirements. This type of flexibility can be a game changer for companies that are going through substantial growth
Also, qualifying for this type of funding is easier than obtaining conventional financing. The most important requirement is to have customers with good commercial credit. Aside form that your company should not be in serious financial distress and your invoices should not be encumbered by liens. Most lines can be deployed in a week or two, which is great for manufacturing companies that have unexpected cash flow problems and need quick funding.