Invoice Factoring For Manufacturer Invoices
If a manufacturer’s working-capital problem is shipped, accepted commercial invoices, not a plant full of raw and WIP that needs a borrowing base, factoring is the right fit. Factoring buys or advances on those invoices. The decision point is whether the balance-sheet problem is unpaid invoices already sitting on the books, or raw material and work in process that has not shipped yet.
Terms and facility size sit on Invoice Factoring.
How This File Is Underwritten
- Shipped and accepted: The invoice should be for goods that have left the dock and that the customer has not rejected. Proof of delivery, a signed packing slip, or an accepted bill of lading is what a factor asks for first.
- Customer credit: The advance follows the account debtor. A thin manufacturer with strong OEMs can factor. A thin manufacturer with thin customers cannot. A factor will often set a sub-limit on a single OEM even when that OEM’s credit is strong, simply to manage concentration.
- Dilution: Returns, warranties, volume rebates, and chargebacks shrink availability relative to the aging. A manufacturer with a clean return history funds closer to the face value of the aging than one with heavy warranty exposure.
- Concentration: One OEM is common, and it still caps the schedule. Two or three OEMs sharing the book fund more comfortably than one OEM carrying most of the schedule.
- Contra: Buying from the same name a company sells to typically triggers a reserve. Purchase orders against the same counterparty should be flagged early so the factor can net the exposure correctly.
- Terms and timing: Net 30, net 60, and longer OEM terms all factor differently depending on how consistently that customer pays on schedule.
Notification is typical. If OEM contracts restrict assignment, that has to be on the table before a factor spends time on the aging. Some OEM purchase agreements bar assignment outright, which can remove factoring as an option for that specific customer relationship.
What Usually Binds
- Eligible AR: Shipped, accepted invoices on acceptable customers set the base.
- Dilution: Returns, rebates, and chargebacks shrink availability relative to the aging.
- Customer concentration: One or two large OEMs can cap the schedule.
- Assignment restrictions: Contracts that bar assignment can remove a customer from the base entirely.
- Inventory financing: Whether raw material or WIP still needs its own facility affects whether ABL fits alongside factoring.
- Contra accounts: Purchases from the same customer a company sells to typically require a reserve.
- Terms and timing: How consistently a customer honors payment terms affects funding speed.
What To Send First
- AR aging by customer
- Sample invoices and proof of delivery or acceptance
- Top customers
- Contra accounts between the manufacturer and its own customers
- Payment terms
- Rebate or return history if material
- Financials and debt schedule
- Existing factor or line
- Bank statements
When Invoice Factoring Is Not The Right Fit
If raw, WIP, and finished goods have to support the line, use ABL for manufacturers. If invoices are to government payors, use factoring for government invoices. If the company needs a term loan against earnings and the invoice book is small, use cash-flow or SBA sizing. A manufacturer running a mixed book of shipped invoices alongside significant raw or WIP financing needs may be better served combining both under one ABL facility rather than splitting collateral across two lenders.
FAQs
Can we factor and still run an inventory line?
Sometimes, with a clean split of collateral, though many files are simpler as one ABL base that includes AR and inventory. Two lenders sharing collateral adds intercreditor complexity that a single ABL base usually avoids.
Do customers have to know?
Usually. Silent factoring is a narrower box. A customer who receives a notice of assignment redirects payment to the factor’s lockbox going forward.
We job-shop custom work. Does that factor?
After shipment and acceptance. Work in process against a custom order is not eligible until it ships and the customer accepts it.
Can we factor invoices from international customers?
Sometimes, though international receivables typically carry tighter advance rates and more documentation. Confirm this with the factor early, since not every shop funds foreign accounts the same way as domestic ones.
Does a long-term supply agreement help?
It can support the credit story, but the factor is still funding the specific accepted invoices, not the contract itself. A supply agreement with no invoices yet is not a funding event.