You have a major new customer that wants to use YOU for their business. Exciting times… but wait… how will you cover your costs for manufacturing their order? You start to calculate the purchases you will have to make in order to fulfill their order and your headache starts to grow.
This is a BIG order and you want to prove that you can do an outstanding job. But cash flow is a bit tight for you right now, and you haven’t been able to secure more bank financing yet. What to do?
Factor Financing in the Manufacturing Industry
You remember the article you read on factor financing in the Manufacturing Industry. Could that be the answer for you? How would it work?
Factoring is an option for any business that has accounts receivable. The available credit supplied by the factor is based on the amount of the invoice as well as that company’s credit worthiness. So instead of you waiting 30, 60 or even 90 days before you receive payment, the Factoring Company buys that invoice for a fee and advances you the majority of the invoice payment. Once the customer’s credit worthiness has been established by the factor, funds are usually dispersed to you within 24 hours.
An example of invoice factoring
Let’s say you own a hardware store and sell goods to another business, creating a $10,000 invoice. You extend this particular company 30 day terms to pay the invoice, but you need the cash next week to pay your employees, creating a cash shortfall. You could turn to a bank for a traditional loan, but it likely requires collateral (a physical asset, such as real estate, which can be sold by the lender if you default) and stellar personal credit. Or maybe you qualify but can’t wait several months for the loan to close.
So you turn to an invoice factoring company, and it agrees to buy your invoice for $9,700 in cash — $10,000 minus a 3% factoring fee ($300). The invoice factoring company advances 80% (or $8,000) of the invoice within a few days (although the actual size of the advance will depend on numerous factors, including the total amount of the advance, the age of the invoice and the customer’s creditworthiness). The factoring company then collects the invoice when it’s due and advances the remaining balance owed to you ($1,455).
The factoring fee, also known as a discount rate, can cost from 1% to 5%, depending on the invoice amount, your sales volume, your customer’s creditworthiness, and whether it’s a recourse or non-recourse factor, which refers to who is ultimately responsible for an invoice that goes unpaid — your company or the factoring company.
The Upsides of Factoring
The upside(s) of factoring? Not only have you secured funds for manufacturing the order, but you also proved to your new customer you can handle their business! You’ve proven yourself a professional business owner when you have the knowledgeable factor take over the credit check and collection of invoice payments. Not one but two headaches gone!
Both headaches gone, you can now concentrate on your new customer’s order knowing you will have a new satisfied customer who will continue to bring you orders year after year. Factoring has saved the sale!
Call us now for complete details on how factoring can save your sales.
Email – talley@ providentcfllc.com
Phone (423) 661 - 3900