US manufacturers constantly need working capital. They go to banks and ask for a loan or a line of credit, but often such efforts can be frustrating and futile. Even factoring, in which invoices are leveraged for funding, may not work when there are too few invoices. But manufacturer purchase order finance may just be the solution.
The Problem with the Manufacturing Industry
Manufacturing today, especially in the US, is still in the doldrums. The industry employment rate fell by 10% because of the recession, and its current employment is just half of what it was in 1979. While there are signs of new life brought about by exciting new technologies such as 3D printing, these advances just add to the additional expenditures. US manufacturers today are still using equipment that’s slowly becoming old and obsolete.
For manufacturers, the question of expenditures is crucial. There is payroll to meet, along with other operation expenses. The problem is compounded by the fact that their clients pay in 30 or 60 days. Often this means that a manufacturer may have trouble maintaining an adequate cash reserve for the purchase of supplies when a new project or purchase order comes in. It may even cause a manufacturer to refuse a purchase order that can bring in much needed revenue.
And that’s where manufacturer purchase order finance comes in.
How Purchase Order Finance Works
In this scenario, the manufacturer can take a new order even if they don’t have the money to pay for the supplies needed to complete it.
Once the finance company approves of your request for purchase order financing, they may reserve a percentage of the value of the order (such as 50 to 70%) for your working capital use. Your finance company may pay the suppliers themselves, or they may open a line of credit for you to use. Once your customer pays lender the amount they owe in full after you have delivered the order, you then get the rest of the payment owed to you, after the finance company has deducted its fees.
The manufacturer may not need to have the best credit ratings and there’s no need for collateral, but the finance company will need to evaluate a few things first. The finance company will make sure that:
- You have enough of a profit margin on the order to make the financing worthwhile. Some finance companies, for example, will want to see at least 20% gross profit margins, while 30% is preferable.
- Your company has the ability to complete the order, according to the contract. You have to make enough products in the quality required by your client, according to the schedule specified. You need to have strong financials and you should have enough experience in the type of product requested. If you don’t have the experience, you may consider getting a sub-contractor to manufacture the product.
- Your customer has an excellent reputation. They should have a good history of paying on time, and the purchase order cannot be canceled.
With this type of funding, you can now accept more orders instead of turning them down.