Most small chemical manufacturing companies run into working capital problems because of the way accounts receivable and accounts payable are managed. Most suppliers, especially those that work with small companies, usually demand quick payments. Because of this, the turnaround of accounts payable is fairly quick. Large customers, on the other hand, tend to pay their invoices on net 30 to net 60 day terms. This means that the turnaround of accounts receivable is fairly slow. Basically, you have to pay your expenses quickly but your customers pay their invoices slowly. And unless your company has substantial cash reserves, this will lead into a cash flow problem.

One way to solve this problem is to use the business financing tool known as invoice factoring. Invoice factoring unlocks the money that is tied in slow paying invoices, and provides your chemical manufacturing company with the needed working capital to meet expenses and tackle new opportunities. The transaction works by partnering with a factoring company that advances funds against your accounts receivable, while holding it as collateral. Ultimately the transaction is settled once your customers pay under usual schedule.

When used correctly, factoring can alleviate working capital problems and help ensure that your company always has cash at hand. The most important requirement to qualify for factoring is to have commercial and industrial customers with good commercial credit. This is critical because the factoring company is relying on the credit worthiness of your customers to finance this transaction. There are also other requirements that your company will have to meet, such as:

1. You can only finance invoices for delivered and accepted product
2. Your invoices must be free of encumbrances
3. Your company must not have legal or tax problems
4. Your management team must have experience in the industry

Most factoring lines are structured to be flexible. This means that the factoring line can grow with your sales, as long as your company meets the factoring funding criteria. Additionally, factoring companies are used to working with small businesses that are challenged by working capital problems. This makes factoring a great alternative for chemical manufacturing companies that are going through growing pains.

Most manufacturing companies tend to have regular recurring expenses to cover payments for suppliers, payroll, equipment, rent, and other items. However, most manufacturing customers pay invoices on a  30 day to 60 day payment schedule. So while the money going out through Accounts Payable is usually going out quickly, the money coming in through Accounts Receivable is usually flowing in slowly. Although this is not a problem for large manufacturing companies that have adequate financing or a substantial reserve, this situation can create a serious working capital problems for everybody else.

One way to solve this cash flow problem is to use invoice factoring. Invoice factoring helps reduce the time it takes you to convert your Accounts Receivable into cash, which provides the working capital your company needs to meet operating expenses and tackle new opportunities.

Invoice factoring does not require your customers to pay sooner. Rather, an intermediary financing company called a factoring company advances funds to your company while holding its accounts receivable as collateral. The transaction settles once your customer pays the invoice under the usual payment schedule.

Most factoring transactions are structured using at two installment system. Your company gets the first installment, around 80% of your Accounts Receivable, once the product is delivered to and accepted by your customer. Your company gets the second installment, the remaining 20% (less the factoring fee), once your end customers pay in full. When used correctly, factoring line can improve your working capital and enable you to better manage your business.

The most important requirement to qualify for factoring is to have credit worthy customers. This is important because the whole transaction hinges on the fact that your customers will pay their invoices, and will pay them on time. Also, your company has to meet the following criteria:

1. You must only invoice for delivered product
2. Your invoices have to be free and clear of liens
3. Your company must not have legal or tax problems

Factoring companies offer flexible financing to manufacturing companies that would otherwise not qualify for conventional business financing products.  Additionally, most factoring lines are designed to dynamically increase with your revenues, provided your company and your customers meet the factoring criteria. Because of this, factoring can be an excellent source of alternate financing for manufacturing  companies that have great opportunities but are being held back by working capital problems.

Most companies in the tool and die business have have a common cash flow problem. They have immediate expenses, such a payroll, suppliers, machine repairs and others. Coupled with expenses they also have delayed revenues, because most customers pay their invoices in 30 to 60 days. This means that expenses are immediate but revenues are delayed. Now, if the company has a cash reserve (very recommended), this will usually not be a problem because expenses can be covered from the reserve until invoices pay. On the other hand, if the company does not have a reserve, this can create a problem. A serious problem.

Some tool and die companies will avoid issues by juggling their cash flow. They will usually delay payments to suppliers while at the same time enticing customers to pay quickly. One way to entice customers to a quick payment is to offer them a 2% discount for early payment. Juggling cash flow can work, but has some uncertainty. For example, customers may elect to pay slowly regardless of enticements and suppliers may insist that you pay quickly.

For many, a better solution is to use business financing to cover any cash flow gaps. However, most conventional business financing solutions have tough qualification criteria. For example, institutions will demand that clients have impeccable financials and solid collateral before providing a business loan. Few small or mid-size tool and die companies will be able to meet this criteria.

One solution that can solve cash flow problems created by slow paying clients is invoice factoring. Invoice factoring tackles this problem by accelerating your revenues due from slow paying customers (through financing)  - providing you with the needed cash flow to meet your current expenses and grow your business.

Basically, in a factoring transaction, the factoring company advances your company funds using your invoices as collateral. You get immediate funds while the factoring company waits for payment from your customer. The transaction closes once your customer pays in full. And since your invoices are the main collateral – the biggest requirement to qualify for factoring is that your customers need to have good commercial credit. Aside from that, your company needs to be free of legal and taxation problems.

Another advantage of factoring is that it’s flexible. Your financing line is directly tied to your sales. This means that your financing will grow with your company, provided you sell to good credit worthy customers.