For a manufacturer, getting and maintaining control over working capital is a particularly critical issue. Ensuring that revenues come in on time, so that timely payments can be issued to suppliers, is critical. After all, a manufacturer can’t operate efficiently, or meet deadlines, if its supply chain is interrupted in any way. Where other businesses would be seriously inconvenienced, a cash flow interruption can completely halt production for a manufacturing business.
Unfortunately, manufacturers are often forced into relationships that leave them exposed to exactly this kind of financial risk. While their suppliers offer only short payment terms, their own customers often require very long terms, particularly if they’re large businesses. That means the amount of time between making an investment, and receiving the returns on that investment—and payment for their work—is maximised. To succeed, they need to plan far into the future. Conversely, late payments, equipment breakdowns, and other kinds of cash flow interruptions leave them with little or no time to respond.
To give themselves the time that they need, and to generate the capital they need to operate smoothly and without worry, businesses are increasingly turning to alternative financing solutions. Supply chain finance and invoice finance allow businesses to take off the pressure by shrinking or even eliminating their cash conversion cycle.
Manufacturers are caught between suppliers and customers
Businesses of all kinds work hard to minimise their cash conversion cycles (CCC). That means, they want to ensure that the time between making an investment, and receiving the returns for that investment, is as short as possible. The shorter that time is, the more quickly that money can be reinvested to produce more returns, or to deal with other financial needs.
Because of this, whichever business is dominant will try to force payment terms that shorten their own CCC, by delaying outgoing payments to suppliers, and ensuring that clients pay up front. Even relatively significant manufacturing companies often stand between massive retailers and huge international suppliers, leaving them in a poor position on both ends. To eliminate this stretching of their CCC, these businesses need to combine supply chain finance with invoice finance to address the problem from both ends.
Supply chain finance delays outgoing payments and cuts costs
Supply chain finance allows businesses to give themselves the longer payments terms that they didn’t get from their supplier. Instead of paying suppliers out of their working capital, businesses use a third party, investor-furnished credit fund known as a working capital loan. The balance on the fund can then be paid off at a later date, up to 90 days after the payment was issued.
Cutting supply costs by paying early
This doesn’t eliminate the need to negotiate the best possible payment terms, though. Suppliers want the earliest possible payments, and businesses who have reasonable payment terms can take advantage of supply chain finance to not only shorten their CCC, but also to reduce supply cost. The manufacturer can offer to pay their supplier earlier—for example at the point of sale—in exchange for a discount. If the supplier agrees, the payment is made from the credit fund, and the manufacturer doesn’t have to pay any sooner than they would have regardless.
Invoice finance gives businesses an advance on revenue
Delaying supplier payments is enormously helpful to businesses, but manufacturers can go further to gain full control over their finances by also using invoice finance. Instead of waiting for weeks or months revenues come in from clients with long payment terms, they simply trade the outstanding invoice in for an advance payment.
Their financial institution accepts the invoice, and issues most of its value in an up front payment. Later, when the payment is due, they go on to collect the client payment themselves, before issuing the remaining funds, less their fee. It’s also important to note that, because the financial institution collects payments from the customer on its own, the business is additionally protected from any potential late payment.
This means that, using these working capital lending tools, manufacturers can reduce their own CCC drastically. In some cases, they may even be able to eliminate it entirely, which means the business can collect revenues on products before payment for the inputs that made those products is due. This means that, instead of waiting for revenues or scrambling to make payments, it can reinvest that capital to drive growth, manage cash flow interruptions, or deal with other costs.