A manufacturer financing scenarios using invoice factoring
Supply Chain Finance Scenario – Manufacturer Financing through Invoice Factoring
In the following manufacturing finance scenario, we describe how invoice factoring helps a manufacturer who wants to grow their business.
The Wonderful Widget manufacturing company wants to expand from regional to national distribution. They need to produce a significantly higher number of wonderful widgets, and they also need to establish a nation-wide network of distributors for their widgets – all in a short period of time.
To help them attract the best distributors in various regions, they want to extend favorable payment terms so that distributors can stock more of their wonderful widgets.
They can accomplish their goals, but only if they have access to the money currently owed them by distributors in their current operation region. So they factor – or sell – these unpaid invoices to an invoice factoring company, and gain access to working capital immediately.
The factoring company advances (from 90% to as high as) 98% of the value of each of the customer invoices factored (or sold) to them by the Wonderful Widget manufacturing company, and holds the rest in reserve.
Once the customer paid the invoice, the factoring company also returns the reserve amount to the Wonderful Widget manufacturing company, less a small factoring fee (fees often range from 1-5%).