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 recent survey. The next largest segment was labour hire, which only accounted for 7% of our sample. Our finding is also supported by the most recent set of statistics, Q4 2015, from the ABFA (Asset Based Finance Association). Their statistics identified that manufacturers made up 28.7% of their member's client base, a very similar number to our survey.
The reason for this high usage level within this sector is driven by several different factors:
- 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.
So the high proportion of invoice finance users within the manufacturing sector is not surprising when you consider the above points.