Manufacture Factoring Gives Your Business More Profits

There’s a recent spate of news in the media lately about the rebirth of US manufacturing, and that’s being spurred by higher production costs in places like China, while US manufacturing is demonstrating higher productivity levels and lower energy costs.

Of course, if you are a manufacturer then you need to make sure that you can cover all your labor and material costs so that you can fuel your growth as a company. That’s easier said than done, but actually you can get the working capital you need simply by using your accounts receivable to make use of factoring services. Not doing so can really slow down your growth.

The Traditional Manufacturing Payment Process

Let’s say you can’t get a line of credit or a bank loan, which isn’t really all that unusual these days. In a very simple sense, this means you’re entirely relying on completed payments before you have the cash to pay for material and labor to pay for the widgets you manufacture.

Here’s one example of how this works. You take 15 days to manufacture a batch of widgets, and it costs you $50,000 in labor and materials. Your customer takes the delivery, but pays $80,000 in 45 days. That means from start of the manufacture to getting your money takes 60 days, or two months.

Then you start all over again, all the while making $30,000 every two months. So in 6 months, that’s $90,000 in profits with three batches of widgets.

The Manufacture Factoring At Work

In this case you have your manufacturing costs covered, so the process is different. It’s much more efficient.

Since manufacture factoring gets you an advance on the account receivable, you can get enough of an advance to start manufacturing right away. Even an 80% advance gets you $64,000 on the invoice, which means your initial costs are covered adequately.

So after the 15 days you can start manufacturing right away, so that you make $14,000 in profits every fifteen days just from the cash advance. That’s $28,000 in a month, and in 6 months that’s $168,000. But starting from the two-month mark, you get the rest of the first batch’s payment, which is the remaining 20% of the $80,000. If your factor charges you 1.5%, then that leaves you with 18.5%, which is still $14,800.

From the 2-month mark to the end of 6-month period, the factor gives you $14,800 every fifteen days. That means in that four-month period, you also get an additional $118,400.

So in six months you receive $168,000 + $118,400, for a profit of $286,400. Compared to $90,000 during that same period, you earn an additional $196,400.

Of course, the math here is somewhat simplified, but the core of the matter remains accurate. When you have the cash flow to cover manufacturing costs immediately, you can operate much more efficiently. That means greater productivity, and greater profits. So if you can’t get a line of credit or a loan to cover your manufacturing costs, then you can get the necessary capital through manufacture factoring.