Securing a manufacturing payment guarantee to meet production targets

Securing a manufacturing payment guarantee to meet production targets

It’s no secret that manufacturing operations are capital hungry.

From investments across capital equipment to holding inventory components, free cash flow can get tied very quickly with new sales.

What happens if a larger than expected order drops in, one that requires a significant investment in raw materials and the buyer (your customer) can only offer a 30% deposit (or less)?

It’s not uncommon that you might struggle to get support from your bank, existing factoring provider or venture partners.

Here are some typical scenarios where you’ll get roadblocks:

  • You’ve maxed out your balance sheet already
  • Funds far exceed existing assets traditionally lent against
  • You’re a startup
  • You’re not producing healthy profits yet
  • Your current lender has reached their comfort level
  • You’ve had a rough trading year, taken a few “hits.”
  • Existing lenders don’t want to take the “performance” risk

There’s a financing tool called “production finance” that investment-based lenders offer that extends funding based on the strength of your contracts or purchase orders. It’s a hybrid of another funding product called “purchase order finance”.

Typically there are two ways production finance can work:

Provide payment guarantees to a third-party manufacturer

It is common when using third-party factories to place a 30% deposit and the balance payment to release goods to ship. In some circumstances, factories ask for a guarantee of payment for the full amount, from the start of production.

In both of the cases above, the production financing can provide via payment guarantee release of funds once goods get manufactured to specification.

It can also be used by the factory to raise funds against the guarantee with their local bank to procure raw materials.

Provide funds for the manufacturer directly to procure materials

In this instance, production financing is provided to the manufacturer directly. You (the manufacturer) receive a larger than expected order that requires a significant amount of capital to pay suppliers to bring in materials or components to produce the final product.

It’s common to look for outside funds as general working capital is exhausted or diverted to other activities. Using up reserves for inventory may leave the operation short of paying wages and expenses.

It then makes sense to source outside capital to fund the purchase of goods and reserve operating cash flow to ensure OpEx is met.

Both scenarios above rely on the borrower having a strong reason to go into production or procurement of goods such as a sales order or supply contract.

Whether you use a third-party factory or produce goods yourself production finance can provide the capital to secure profitable orders to meet delivery dates.

Need help funding inventory or manufacturing operations? Ask Stak.

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We regularly share our thoughts on trade finance, lending, procurement, logistics, and international trading.

Stak provides working capital to clients that sell to some of the largest buyers in Australia & overseas.

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