Managing cash flow is always a challenge for manufacturing company owners. Company managers always walk a fine line trying to balance income and expenses.
Paying suppliers, covering overhead, running production, and building inventory all place immediate financial demands on your company. Meanwhile, your clients demand longer payment terms. These conflicting demands affect your cash flow and your ability to invest in opportunities.
The obvious solution is to use financing. However, getting financing is difficult, especially for small and midsize manufacturers. And even if you get financing, most solutions are inflexible, aren’t designed for manufacturing companies, and don’t scale well.
1. Large orders and building inventory
The situation becomes more challenging if you are trying to fulfill a large order or if you need to build up inventory. Both scenarios require that you make substantial raw material purchases from your suppliers.
To make these purchases, your company must have credit with your suppliers, access to financing, or a large cash reserve. Without these funding sources, you won’t be in a position to make the additional raw material purchases. Ultimately, this dependency affects your ability to run your production line, capitalize on opportunities, and grow.
2. Finance raw material purchases
If you need raw materials to deliver on a large order or you need to build up inventory, consider using supplier financing. It is a form of “work-in-progress financing” that enables your company to buy raw materials from your suppliers. This funding allows you to run your production line effectively, so you can capitalize on new opportunities.
Supplier financing can be used as a stand-alone solution to help you with your supplier purchases. However, the solution can also be used to enhance your existing financing. This versatility provides a tool that helps you manage your cash flow more effectively.
3. How does supplier financing work?
The supplier financing company intermediates purchases between your company and your supplier. When you need to buy raw materials, you place an order with the supplier financing company. In turn, the supplier financing company extends credit to your company and places a corresponding order with your supplier.
The supplier handles production and delivery of the raw materials to your company. Lastly, the finance company issues an invoice to your company, which is paid at maturity. Learn more about how supplier financing works.
4. Supplier financing enhances existing financing
Supplier financing is usually compatible with any of your existing financing products. The financing company does not require collateral or take a lien on any of your assets (except in unusual circumstances). Consequently, you can use it alongside most lines of credit or similar products.
5. What are the qualification criteria?
Supplier financing can be used by small and midsize manufacturing companies. It is an ideal solution for middle-market companies. To qualify, your company must:
- Manufacture goods
- Need funds to buy raw materials
- Have at least two million dollars in annual revenues
- Provide accurate financial statements
- Have product liability insurance
- Be credit insurable by Euler Hermes
- Have an existing supplier network
Note that these are the minimum qualification requirements. For more detailed information, learn more about the qualification criteria.
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