In a capital-intensive industry like manufacturing, planning is everything. If you run a manufacturing company that experiences seasonal business cycles, you know just how challenging it can be to fulfill an overwhelming rush of demand part of the year and efficiently manage finances during slow months. With slow sales comes inconsistent cash-flow. To complicate matters further, you cannot afford to wait 30, 60 or even 90 days to receive payment from your customers.
The secret to overcoming seasonal business differences is diligent prep work, strong cash flow management and flexible financial resources. One of the most utilized financial tools for managing – and even preventing – extreme shifts and gaps in cash flow is invoice factoring.
What is Manufacturing Invoice Factoring?
As the name implies, manufacturing invoice factoring allows your business to secure much needed capital by using unpaid invoices. Also known as accounts receivable financing, this option involves selling your business’ outstanding receivables to a factoring company (the factor) at a discount. The factor will quickly advance up to 95% of an invoice’s value upfront. This working capital can then be used for a long list of needs and challenges. From buying new equipment and purchasing raw materials to meeting regular payroll and taking on new orders, your company secures the capital it needs to operate smoothly and efficiently.
How Manufacturing Helps Seasonal Businesses
Here are four key ways invoice factoring can prove to be a valuable resource to your manufacturing company during both seasonal highs and lows.
Is your manufacturing company seeing an increase in large projects or multiple orders? When your business experiences rapid growth, it can quickly lead to a tight cash flow situation that hinders production. Even the most successful companies can become cash strapped due to the gap between expenditures and income. Instead of waiting 30 or 60 days (sometimes even longer) to receive payment from your customers, you can quickly factor invoices and gain predictable cash flow. As production demands ramp up, you will have the cash you need to upgrade equipment, purchase supplies and cover payroll.
Eventually, every busy season will slow and orders may start to drop off. When this occurs, it is important to have proven ways to accelerate cash-flow. Invoice factoring can help you proactively combat the cash flow drought of the slow season by allowing you to offer customers more preferable terms. For example, rather than requiring your customers to pay in 30 days, you could extend 90-day payment terms. Meanwhile, you can factor that invoice and collect in advance. Your customers enjoy more attractive payment terms, and you keep cash flowing well into the off-season.
When business scales down during seasonal shift patterns, covering day-to-day costs can become challenging. You might be forced to make tough decisions like laying off employees to sustain operations. Factoring can provide the quick capital you need to pay fixed costs like employee salaries and balance cash flow across the whole year – without having to sacrifice your savings. It also provides you with the flexibility to choose which invoices you wish to factor, and which invoices you want to factor from those customers. Managing transitional periods are made easier and you avoid committing to a loan that could impact your business’ long-term financial health.
Surviving the Off-Season
Is there a project you would like to pursue? Do you need to make equipment repairs or upgrade an outdated piece of machinery? Would you like to build a cushion of cash to be better prepared for unexpected expenses that could cripple productivity? Having more consistent cash flow during the off-season means you can achieve goals and chase opportunities even when production slows down. Factoring can also help you unlock cash your business has already earned, so you can build a cash reserve to weather a downturn when business drops off. Secure the capital you need quickly and when you need it most.
How Does the Manufacturing Factoring Process Work?
Step 1 – Invoice your client
Once you have provided products or services to your customer, you issue an invoice for them to pay you. For the invoice to qualify for factoring, it must be payable within 90 days.
Step 2 – Sell and assign the invoice
The factoring company will conduct due diligence to ensure the customers you are invoicing are good credit risks. A contract is then signed between you and the factor detailing all rates and limits.
Step 3 – Receive your advance
The factor will give you an initial advance known as the “advance rate.” The advance rate is typically 80% to 95% of the value of the factored invoice, but will ultimately be determined by the size of your transaction and your industry.
Step 4 – Client pays the factor
Your customer is obligated to pay the factor according to the terms of the invoice. Meanwhile, your business operates as usual and can even submit new invoices for funding during this time.
Step 5 – Secure reserve amount
After receiving payment from your client, the factor will give you the remaining balance of the invoice, minus any factoring fees.
Security Business Capital’s Invoice Factoring Services
It is never too early to prepare for seasonal booms and slumps. The team of experts at Security Business Capital can help you secure the funds you need to adapt quickly, operate smoothly and take advantage of new opportunities. Our cash flow solutions are both flexible and customizable, allowing your business to quickly generate cash on hand to carry you through changes and challenges.
If you are interested in learning more about how our staffing factoring services work and how they can help your business grow, get in touch with us today for a free quote and/or consultation.