Why Invoice Finance Works For Manufacturers
Manufacturers have always been typical users of invoice finance (IF), such as factoring and invoice discounting.
Our own reserch identified that manufacturers make up the largest segment of users of IF, accounting for 25% of respondents in our independent survey. The next largest segment was labour hire, which only accounted for 7% of our sample.
There are a number of reasons why we see so many manufacturing companies turning to this type of funding to boost their working capital position.
Reasons Why Manufacturers Use Invoice Finance
The reasons for this high usage level within this sector include the following:
- Gross Profit Margins - typical gross profit margins, amongst manufacturers, may range from 25% to 35% so the prepayment from invoice finance (typically 85% of invoice value) will allow a manufacturer to pay for their raw materials and other costs, before they get paid. Discounts with suppliers can often be negotiated when you have cash to pay quickly.
- Payment Terms - the ABFA's 2014 report into late payment by sector identified 3 manufacturing sectors (pharmaceuticals 69.4 days, machinery 68.6 days and electrical equipment 67.0 days) as amongst the sectors having to wait the longest for payment. The 2013 Payment Study, by CRIBIS D&B, found that in only 23.2% of cases manufacturers were paid on time. These delayed payments create a cash flow gap between having to pay suppliers for raw materials and getting paid. Invoice finance bridges this gap.
- Straightforward Transactions - the nature of manufacturing is such that it normally gives rise to simple transactions. You make something, ship the product and get paid for it. This type of straightforward transaction is very appealing to invoice financiers as they can easily value such debts, in order to fund against them.
- Seasonality - some manufacturing can be very seasonal by nature e.g. manufacture of fireworks. In such cases there may be a need for temporary cash flow assistance to get through peak trading periods. Some invoice finance solutions allow you to selectively use the funding as and when you need it, controlling costs.
So the high proportion of invoice finance users within the manufacturing sector is not surprising when you consider the above points.