Invoice Financing for Manufacturers: A Quick Solution for Cash Flow Issues
Irregular cash flows affect a manufacturer’s working capital.
A business needs more cash reserves to meet its working capital requirement. As a manufacturer, you can use financing methods such as invoice financing. Manufacturers must evaluate their working capital policies to determine financing options, such as invoice discounting.
For instance, KredX’s Invoice Discounting offers a platform for invoice financing for small businesses. This article discusses how invoice financing can work for manufacturers and the challenges it may present.
What Is Invoice Financing?
Invoice financing is a form of business financing that allows manufacturers to borrow instant funds against their accounts receivable by using unpaid invoices as collateral.
Manufacturers may hold a considerable amount of their capital in accounts receivables. The receivables may make up a substantial percentage of the business’s assets, and this is where invoice financing becomes crucial. It can help the manufacturer meet its working capital requirement making it an attractive alternative for them.
How Does Invoice Financing Work for Manufacturers?
Invoice financing for manufacturing is an attractive business financing option that allows the business to access buyers immediately without waiting for them to pay. As a result, it enables the company to meet its working capital requirement and avoid cash flow issues when buyers take time to pay. Therefore, it is a financing option for slow-paying accounts that allows manufacturers to meet near-term liquidity needs.
The Process of Invoice Financing
Three parties are involved in invoice financing –
- The manufacturer that issues the invoice
- The buyer that receives the invoice
- The financer
Step 1: The manufacturer will provide the service or product to the buyer. They will then issue a business invoice for the products supplied. The invoice maturity usually is between 30-120 days.
Step 2: The manufacturer will contact an invoice discounting company to enter an agreement and then send the invoice to the lender.
Step 3: Financer sends the manufacturing business cash representing a percentage of the invoice’s value, usually 80%. For instance, KredX’s Invoice Discounting solution ensures clients get money within 24-72 hours.
Step 4: The financer will collect the payment from the buyer at the maturity of the invoice.
Step 5: After receiving the payment from the buyer, the financer will remit the rest of the amount to the manufacturer after deducting the agreed-upon fees and interest.
Risk and Challenges of Invoice Discounting for Manufacturers
Although invoice discounting India is an excellent short-term financing solution, it may have some drawbacks. There are various risks and challenges of invoice discounting for manufacturers that business owners should be aware of:
May Slow Down Profits
Among the main drawbacks of invoice financing are the processing fees and interest charges. It is vital to note that this is a business loan, and the costs and interest may affect the margin because the manufacturer needs to recoup the total value of the invoice. If a business mainly relies on invoice discounting, it may stifle growth and expansion because of reduced margins.
Its Problem-Specific Business Financing
Invoice financing is a form of business financing that addresses working capital problems. Businesses do not have to use this facility if their goods or services are paid for on time. As a result, the business may need to consider other forms of financing for its growth and expansion.
Invoice discounting in India may be a flexible financing option, but it has some risks for the financer. For instance, there is the prospect of the buyer not paying the invoice. As a result, most invoice discounting firms will only advance funds to creditworthy businesses. But platforms like KredX, provide vetted invoices with 360-degree credit analysis on the invoices, as well as the business, which reduces the chances of any defaults.
Frequently Asked Questions
Q. What is invoice financing for manufacturers?
A. Invoice financing for manufacturers is a financial arrangement in which a lender advances funds to a manufacturer based on unpaid invoices. The manufacturer can use the funds for its working capital requirement.
Q. How does invoice financing work for manufacturers?
A. The manufacturer submits its outstanding invoices to the lender for approval. The lender reviews the invoices and determines the funds it can advance. The lender typically offers the manufacturer around 80% of the invoice value. Once the customer pays the invoice, the lender deducts its fees and interest and returns the remaining funds to the manufacturer.