How Manufacturers Can Manage Working Capital with Invoice Discounting

Efficient cash flow is quite crucial in the manufacturing industry and indispensable for day-to-day operations, as well as the expansion of any business. As highlighted in a report by the Reserve Bank of India (RBI), about 42% of small and medium manufacturers from India faced liquidity problems. This helps the manufacturer comprehend how working capital management maintains smooth production cycles, timely delivery, and business growth.

A realistic way for the manufacturers to improve cash flow would be invoice discounting. It is the offer for finance which frees money that has been tied up in invoices that have not been paid to ensure full utilisation of their capital bases.

In this blog, we’ll explore how invoice discounting solutions for manufacturing can support businesses by improving cash flow and reducing financial strain.

Understanding Working Capital and Its Importance for Manufacturers

The difference between current assets and liabilities is working capital. It is a measure of a company’s liquidity and its capability of paying or meeting its short-run obligations. Working Capital for manufacturers is used primarily for: 

• Purchasing raw materials
• Meeting operational expenses
• Paying wages and salaries
• Managing debt obligations
• Investing in new machinery and technology

A shortage of working capital may disturb production cycles and impinge on the ability of the manufacturer to meet orders. Typically, orders received by manufacturers are on credit, so payments by customers are not right away but several weeks or months later. Meanwhile, the manufacturer requires finance to continue their operations. That is where invoice discounting steps in. 

What is Invoice Discounting?

Invoice discounting is a form of financing wherein the business can borrow money against its due invoices. This form of money availability gives instant cash to manufacturers without waiting for payment from customers. Basically, it means steering clear of bank loans, which may have very strict requirements, and finding access to quicker, more flexible invoice discounting options.

A manufacturer can submit their receivable invoices to the financial institution or online platform that advances a certain percentage, usually 80-90%, of the invoice amount upfront. When the customer makes payment on the invoice, the remaining amount less a nominal fee is forwarded to the manufacturer. The solution helps in improving cash flows and keeping manufacturers’ operations running smoothly.

Benefits of Invoice Discounting for Manufacturing Companies

For manufacturers, the benefits of invoice discounting span beyond mere improvement in cash flow. So, some of its key benefits include:

• Immediate Access to Cash Flow

Manufacturing firms have to live with the fact that their customers require 30 to 90 days before making payment. The process of invoice discounting helps manufacturing businesses tap some funds owed to their business in the form of invoices that have not yet been paid, therefore immediately increasing the daily cash flow for the day-to-day operations.

• Flexibility Without Adding Debt

Unlike the traditional loans, which add to an enterprise’s debt burden, invoice discounting is a self-liquidating arrangement. This means that the amount borrowed is repaid as and when the customer clears his invoice. Manufacturers need not bother about long-term debt commitments or interest rates.

• Strengthening Supplier Relationships

This good and consistent cash flow means that the manufacturers are able to make timely payments to their suppliers, hence building trust and dependable relationships with them. Early payments may also mean some discounts by suppliers, reducing more costs and increasing profitability.

• Keeping Up with Production Demand

This could also be the case when a shortage of working capital holds a manufacturer back from fully taking advantage of the increasing demand for their products. Invoice discounting will provide the funds to take in raw materials, additional staff, or equipment to expand production capacity without waiting for customer payments.

• Reducing Financial Stress

Unpredictable cash flow places any firm in financial stress and makes it difficult to plan for the future. Invoice discounting will reduce the burden on manufacturers by allowing them immediate access to funds, which helps them to focus on their growth and innovation.

How Invoice Discounting Strengthens Working Capital for Manufacturers

In any manufacturing organisation, there is a need for working capital to ensure the processes flow seamlessly. Invoice discounting for manufacturing offers a strategic approach and solution to improving the working capital in the following ways:

• Smoother Cash Flow Management

With a large proportion of current assets consisting of unpaid invoices, invoice discounting helps turn them into cash. This is how the manufacturers are in a position to maintain their cash flow regularly, which becomes essential for day-to-day dealings.

• Avoiding Payment Delays

Waiting for customers to pay up translates to delays in the purchase of materials, hiring of staff, or other financial obligations. Invoice discounting removes this waiting period; today, a manufacturer has at hand the funds required to meet immediate obligations. 

• Better Credit Control

Unlike traditional loans, invoice discounting lets manufacturers enjoy the weight of sales in securing financing. The manufacturer retains control over their customer relationships, and the customer can often be unaware of the invoice discounting arrangement, making for business continuity without impact on credit control.

• Minimising the Risk of Bad Debt

While manufacturers can control most aspects of their business, it usually is one area that is not predictable: customer payments. Invoice discounting solutions allows manufacturers to get financing against confirmed invoices, thereby reducing the risk associated with late or non-payments.

Key Considerations for Manufacturers Using Invoice Discounting

Although invoice discounting is a highly feasible solution to improve working capital, there are some aspects that a manufacturer must consider before choosing this solution:

• Eligibility: Not all invoices qualify for discounting. Manufacturers need to ensure that the invoices submitted are valid and from creditworthy customers.
• Fees and Costs: There are fees associated with invoice discounting, which vary depending on the service provider. Manufacturers should assess whether these costs are manageable compared to their cash flow needs.
• Customer Relationships: While most invoice discounting arrangements are confidential, manufacturers should ensure that the process doesn’t disrupt their relationships with customers.

Why Invoice Discounting is Ideal for the Manufacturing Sector

This industry is typically facing special constraints: extensive production periods, high initial investments, and long purchase payments from customers. Invoice discounting provides liquidity to the manufacturers necessary to handle the problems caused by the immediate availability of liquid funds. 

Some of the key reasons why invoice discounting works well for manufacturers include:

• Seasonal fluctuations: Many manufacturers experience peaks and troughs in demand, which can impact their cash flow. Invoice discounting allows manufacturers to access funds during slower periods and prepare for busy seasons.
• Supplier payments: Regular cash flow allows manufacturers to negotiate better payment terms with suppliers, leading to potential cost savings and improved profitability.
• Growth opportunities: With the immediate availability of funds, manufacturers can seize new opportunities without worrying about delayed payments from customers.

Final Thoughts

In the competitive manufacturing environment, demand for steady cash flow is essential for operational efficiency and long-term growth. Invoice discounting solutions for manufacturing offers flexible, cost-effective means of improving working capital whereby manufacturers will meet financial obligations, reduce debt, and focus on expansion.

If you are a manufacturer looking to optimise working capital and earn better cash flows, it would be worth seeking invoice discounting solutions. KredX, India’s largest supply chain finance platform, has invoice discounting options available that may help manufacturers stay competitive and financially secure. Reach out to the experts at KredX to learn how invoice discounting can help your business grow.