Factoring for Manufacturers

The manufacturing cash cycle

A manufacturer's cash goes out in stages. Raw materials are bought, often on supplier terms shorter than the manufacturer's own customer terms. Labor and overhead are spent during production. Finished goods sit in a warehouse or in transit. Only after shipment and invoicing does the receivable exist, and then the customer, often a larger OEM, distributor or retailer, pays on its standard terms. The total cycle from buying steel or resin to collecting cash can stretch for months.

Factoring addresses only the last stage: the period between shipping and getting paid. It does not fund raw materials or work in process, because until a product ships and the customer owes for it, there is nothing to sell to a factor. That distinction shapes how manufacturers use factoring. It works best when the business is profitable per order but growing faster than its cash, or when one or two large customers impose long terms that a smaller manufacturer cannot carry.

Who factors manufacturing invoices

Two profiled factors lead with manufacturing. Universal Funding publishes a first-30-day rate of 0.55% to 2%, advances up to 95%, a $25,000 monthly minimum and facilities up to $20 million a month. Crestmark, now part of Pathward, N.A., advances 80% to 95% against manufacturing receivables inside a bank. Nineteen more name it as one of several industries. FundThrough prices 1.9% to 2.9% per 30 days with up to 100% advanced less one flat fee, entirely online. Rosenthal & Rosenthal writes facilities from about $500,000 to $40 million for apparel and other manufacturers. Porter Capital advertises rates from 0.4% and lines up to $25 million, altLINE publishes 1% to 5%, and Integra Funding Solutions funds light-industrial and aerospace suppliers the same day with no volume minimums. Importers and wholesalers can add purchase-order finance and letters of credit at Express Trade Capital, which has annual minimums. The comparison table below shows what each of these companies publishes.

What a factor needs from a manufacturer

The documentation is straightforward compared with construction or healthcare, but factors still verify that each invoice represents a completed, accepted sale:

• Customer purchase orders showing the item, quantity, price and payment terms.
• Invoices matching those purchase orders.
• Shipping documents: bills of lading, packing lists, carrier tracking or signed delivery receipts that prove the goods left your dock and arrived.
• An accounts receivable aging by customer and an accounts payable aging, which shows whether suppliers are being paid and whether any supplier may claim goods.
• Customer contracts or vendor agreements with large buyers, because they often contain chargeback, rebate, quality hold and right-of-return provisions.
• A list of existing lenders and UCC filings, so the factor can see who else claims your receivables, inventory or equipment.

Once you factor, each customer is notified to pay the factor. Under UCC 9-406, a customer that has received a valid notice of assignment can no longer discharge its debt by paying you, and contract terms that prohibit assigning receivables are generally ineffective. Some large OEMs still have vendor-setup procedures for changing remit-to information, so expect some administrative back and forth.

Where factoring sits next to other lenders

Most manufacturers have more than one secured creditor: an equipment lender, a bank holding a blanket lien, perhaps an inventory lender. Factoring has to fit around them.

Under UCC 9-322, competing perfected security interests generally rank by priority in time of filing or perfection. If your bank filed a financing statement covering "all assets" or "all accounts" years ago, the bank is ahead of any factor on your receivables. A factor will require either a payoff of that lien, a release of the receivables, or an intercreditor agreement with the bank carving out the factored accounts. Equipment lenders whose filings cover only specific machinery usually are not affected.

This is the single most common reason manufacturing factoring deals stall. Pull a UCC search on your own company before talking to factors, so you know who needs to sign off.

Costs and how they are calculated

Manufacturing receivables are often good collateral: the buyers are established businesses, and goods that were shipped and accepted are harder to dispute than services. But manufacturing customers also tend to pay on longer terms than freight brokers or many staffing clients, so the duration cost matters.

A FreightWaves explainer on factoring costs puts typical base rates across industries at 1% to 5% of each invoice, notes that large diversified portfolios can price as low as about 0.4% while small one-off or high-risk invoices can exceed 10%, and shows advance rates of 85% to 90% in its examples, with reserves of 5% to 20%. It also describes tiered pricing that adds a charge for each additional period beyond the first 30 days. For a manufacturer paid on 60- or 90-day terms, that tier structure is where most of the cost sits. We did not find a published, manufacturing-specific rate sheet we could verify, so treat these as cross-industry ranges and get quotes based on your own customer list.

Practical tips for pricing:

• Quote factors on a realistic sample of invoices, including your slowest large customer.
• Ask whether the fee is charged on the gross invoice or the advanced amount.
• Ask how early-payment discounts you offer customers interact with the factor's fee. Stacking both can make some invoices unprofitable.
• Model the result in the factoring calculator.

How factors underwrite a manufacturer

Factors look mainly at the customers, but manufacturing adds several checks:

• Customer concentration. Contract manufacturers and component suppliers frequently sell most of their output to one or two OEMs. Factors set per-customer credit limits and may lower the advance or exclude invoices once one customer exceeds a share of the total.
• Quality and returns history. Warranty claims, quality holds and returned shipments reduce collections. A factor will ask about defect rates and how credits are issued.
• Progress billing and deposits. Invoices for partial completion, tooling, or deposits on future production are generally not eligible, because the goods have not shipped. Only final, shipped invoices are.
• Supplier risk. Unpaid raw-material suppliers can disrupt production and sometimes assert claims. The AP aging tells the factor whether your supply chain is stable.
• Government or export customers. Federal receivables require Assignment of Claims Act compliance (see government contractor factoring), and foreign receivables usually need credit insurance or a factor with export capability.

Pitfalls in manufacturing factoring agreements

Chargebacks, rebates and deductions

Large buyers commonly deduct amounts for late shipments, labeling errors, advertising allowances or volume rebates. Under UCC 9-404, a factor takes your receivables subject to the terms of your agreement with the customer and to defenses arising from the same transaction, so those deductions come off what the factor collects and, under a recourse agreement, come back to you. Read your customers' vendor manuals and price the expected deductions into the advance you rely on.

Supply chain finance programs

Some large OEMs run their own supplier finance programs, through which a bank pays approved invoices early at a rate based on the OEM's credit. If you factor all your receivables, including that customer's, you may be locked out of a cheaper program. Check whether your factoring contract allows you to carve out specific customers.

All-accounts clauses

Many factoring agreements cover all receivables, not just the invoices you submit. Combined with a monthly minimum, that can force you to factor customers who pay in ten days. Negotiate a customer-specific or selective arrangement if most of your customers pay quickly.

Termination and lien release

Factoring contracts often run for a fixed term with automatic renewal and notice requirements. When you leave, the factor must file a UCC termination before a new lender can take first position. The contract reading guide covers what to look for in the termination section.

When a manufacturer should use something else

Factoring is a strong tool for a fast-growing manufacturer whose customers are creditworthy but slow, especially one without the history a bank wants. It is usually not the cheapest long-term answer. Alternatives include:

• A bank or asset-based revolving line that lends against both receivables and inventory, priced as interest. This becomes realistic once you have reviewed financial statements and a stable customer base.
• SBA working-capital programs. SBA's types of 7(a) loans include CAPLines, which finance seasonal increases in receivables and inventory or the costs of specific contracts, and the Export Working Capital Program, with a maximum of $5 million and a 90% guarantee, for businesses with export sales.
• Export credit insurance. EXIM's export credit insurance covers up to 95 percent of sales invoices against commercial and political risk and can make foreign receivables eligible in a lender's borrowing base.
• Purchase order financing, which some lenders offer to fund the supplier cost of a confirmed order before shipment. It is costlier than factoring and suited to resale or contract manufacturing, not in-house production.

If your problem is that you cannot buy materials to start a large order, factoring will not solve it on its own. If your problem is that you have shipped and are waiting 60 days to be paid, it may be exactly right.

Frequently asked questions

Can I factor invoices for goods that have not shipped yet?

Generally no. A factor buys a completed receivable, which exists only after goods ship and the customer owes for them. Deposits, progress billings and tooling invoices are usually ineligible. To finance a confirmed order before shipment, look at purchase order financing or an inventory-based line, and plan for factoring to take over once the order ships and is invoiced.

My bank already has a lien on all assets. Can I still factor?

Only with the bank's cooperation. Because priority usually follows the order of filing, the bank's earlier lien covers your receivables. A factor will need the bank to release the receivables, subordinate its interest in them, or sign an intercreditor agreement. Some banks agree; others treat factoring as a default. Ask your bank before applying.

How do customer deductions affect my funding?

The factor advances against the invoice amount, but if a customer short-pays for a rebate, chargeback or quality claim, the factor collects less. Under a recourse agreement, the shortfall is deducted from your reserve or future fundings. Manufacturers with heavy deduction activity often receive lower advance rates, so tracking and disputing invalid deductions directly improves your funding.

Do factors fund export sales?

Some do, typically with credit insurance on the foreign buyer or through correspondent factors in the buyer's country. Expect more documentation, including insurance policies and shipping documents, and possibly a lower advance. Insured foreign receivables can also qualify under bank lines, so compare both routes.