Anyone who is running a manufacturing business understands how tough it can be to keep the business afloat. To ensure you can still keep production running and to fulfill employee salaries and compensation you may want to look into manufacturing factoring. This is a system that is quick and simple and yet very effective if you want to keep cash flow steady in your manufacturing business. Here is a look at what it is and how it works.
What is Manufacturing Factoring?
Basically manufacturing factoring is when you sell your invoice out to a factoring company. The company will purchase the amount of your invoice instantly. Say you are contracted to manufacture a thousand bottles for a soda company and yet the payment is still weeks away, you can get your payment instantly by factoring the invoice.
Of course you won’t get the full amount stated on your invoice. The factoring firm needs to profit as well so you will most likely be approved for 85-95% of the total invoice value. This means the factoring company will hold the remaining amount until your customer pays the invoice. Then you will receive the remaining amount of the invoice, minus the factoring fee, typically 1-3%.
There are two things to be concerned with here: your credit standing as a company and the client. First of all, if your manufacturing company has poor credit standings you can expect to get a lower percentage when you factor out the invoice. This is to ensure the manufacturing factoring company they are covered for any financial risks.
Most of the time your credit is not even considered. Some invoice factoring firms take a quick look at your history but this is very rare. At the most, a bad credit standing will lead to a higher percentage cut and a lower payout for you.
The second problem is the client. As with any business a client may decide not to pay your invoice. But since you already sold your invoice to the factoring firm, what happens next? There are often two ways this can go. You will need to chase the client and secure the payment or end up having to pay the amount (out of pocket) to the factoring company. The other solution is to get your invoice insured so in case the client decides to run, you won’t need to worry about paying the amount owed yourself. It will be the factoring firm who will handle the damages and chase after the client. The burden will no longer be placed on you. Of course this also means your percentage is cut down a bit more.
Is This Beneficial to Your Business?
The short and sweet answer is a definite yes. Invoice factoring guarantees:
– steady cash flow in the business
– payroll is always met
– credit standing is not moved
– costs of production are met beforehand
You do not have to worry about taking out loans because now you get your compensation before the job is even started. You can meet the financial demands to keep production going. If you want to ensure that all your financial demands are met without having to risk taking out a high interest bank loan, manufacturing factoring is a very ideal option to look into.