Managing the cash flow of a small chemical manufacturing company can be complicated. Unless the company has financial reserves, it probably needs financing to operate effectively.
For most chemical manufacturing companies, working capital problems arise because of the difference between how expenses are managed and how revenues are received.
A common cash flow problem
Chemical manufacturing companies have regular expenses such as staff, payroll, and rent. If your company has a long enough track record, your suppliers may give you up to 30 days to pay. Otherwise, you need to pay suppliers shortly after receiving your raw materials.
Clients, on the other hand, often demand trade credit terms for the option to pay an invoice in 30 to 60 days. Obviously, they demand these terms to improve their cash flow. As a result, they are often reluctant to pay sooner, and this reluctance affects your cash flow. And if you offer credit terms without proper financial backing, you could experience cash flow problems.
It’s not unusual for cash flow problems to develop when your company is growing quickly and doing well. Cash flow problems are also the fastest way to derail growth plans.
Is bank financing a solution?
If you qualify for bank financing – whether it’s a manufacturing loan or line of credit – you can use it to solve this problem. Basically, you pay your expenses out of the financing line and then pay back the line when your clients pay. However, qualifying for bank financing is difficult.
Most banks require that you have substantial assets and are generating enough cash flow to pay for the loan. Banks also prefer to work with larger companies with long track records of growth. These requirements put bank financing out of the reach of most small chemical manufacturing companies.
However, if your clients paid quickly you probably would not have a cash flow problem. You can solve this problem easily by factoring your invoices. Often, factoring can replace a line of credit and provide more financial flexibility.
How factoring your invoices solves this problem
Factoring provides you with an advance for your slow-paying invoices from creditworthy customers. A factoring company wires funds to your account and holds the invoice as collateral. The transaction settles once your client pays in full.
If you use this solution correctly, you can offer payment terms to your clients without having financial problems due to slow payments.
How does factoring work?
Transactions are usually structured as the purchase of your accounts receivables in two installments: the advance and the rebate. Your company gets the advance – usually covering about 80% of the gross value of your invoice – as soon as the chemical products have been delivered and accepted by your clients.
The remaining 20% is rebated after your client pays on their usual terms. The factoring cost is often deducted from the rebate and varies based on the dollar value and quality of your invoices.
You can learn more by reading, “What is factoring?” and “How does factoring work?”
How will factoring benefit my company?
The most important benefit of factoring invoices is improved cash flow. However, this program also provides a strategic advantage: your company is able to offer terms to clients, enabling you to take on new customers and grow your company. If you were unable to offer credit – or had financial limitations – this program can be a game-changer.
One of the advantages of working with factoring companies is that their solutions are accessible to small and mid-sized companies. Unlike larger financial institutions, factoring companies do not have complicated application requirements.
The most important requirement is that your industrial clients have good commercial credit because their credit backs the transaction. Additionally, your company should not have serious legal or tax problems.
Is this solution right for me?
This solution should be right for your business if your greatest problem is that slow-paying clients are affecting your cash flow. Additionally, factoring works best for companies with:
- Gross margins of 15% or more
- Commercial clients with good credit
- Good billing practices
- Industry experience
Get more information
We are a leading factoring company and work with chemical manufacturing companies. For information, get an instant quote or call us at (877) 300 3258.