Finance for manufacturers

A manufacturer's cash is tied up in three places at once: machines on the floor, materials in the stores, and finished goods sitting on customers' credit terms. Each of those has a finance product built for it. Using the wrong one, usually short money for a long asset, is the most common and most expensive mistake.

The cash-flow shape of a manufacturer

Follow one order through the works.

1. Materials. You buy steel, resin, timber or components, often with a deposit, sometimes cash with order from a new supplier.
2. Production. Labour, energy and machine time go in. Nothing comes out yet.
3. Delivery and invoice. The customer gets the goods and an invoice.
4. Payment. For business-to-business deals an agreed payment date must usually be within 60 days; with no agreed date, payment is late 30 days after the invoice or delivery, whichever is later.

From buying materials to banking the payment can easily take a quarter. Grow quickly and the gap gets bigger, because every new order needs funding before it pays.

Late payers are covered by law. You can claim statutory interest at 8% plus the Bank of England base rate on business-to-business debts, unless your contract sets a different rate. You can also add a fixed recovery sum: £40 on debts up to £999.99, £70 from £1,000 to £9,999.99, and £100 on £10,000 or more. Whether you use it with a key customer is a commercial call.

Which finance fits, and which doesn't

Invoice finance is often the best fit for a manufacturer selling to other businesses. It advances most of an invoice's value soon after you raise it, and the facility grows with your sales. Asset finance can also release cash from machines you already own, through refinancing.

Merchant cash advances rarely suit manufacturing: business customers don't pay by card, so the advance is collected by fixed debits, at a high cost.

What it costs: a worked example

Say the company borrows £100,000 at 18% APR over 24 months for a new machine, repaid monthly.

• Monthly repayment: £4,992.41.
• Total repaid: £119,817.84.
• Interest: £19,817.84.

Sterling's rule of thumb calls under 20% "priced like bank lending". Asset finance secured on the machine may come in cheaper still. Now compare it with a cash advance for the same £100,000 at a factor rate of 1.35 over 12 months, paid daily: £135,000 back, 252 payments of £535.71, about 63% APR. Same machine, £15,182.16 more in cost and half the time to pay. The calculator on this page lets you run other rates and terms.

What funders typically ask a manufacturer for

• Filed accounts and recent management accounts.
• An aged debtor list and an aged creditor list.
• Bank statements for the last several months.
• Customer concentration: who your top customers are and how much of the ledger they hold.
• Asset lists and quotes for new equipment.

Larger facilities often come with a debenture, a charge over company assets, and directors may be asked for a personal guarantee.

Red flags specific to manufacturing

1. One customer, most of the ledger. Invoice finance providers often cap funding against a single debtor. If your biggest customer is most of your sales, ask about concentration limits early.
2. All-assets charges on a small facility. A debenture over everything for a modest loan can block cheaper finance later. Ask what is charged and why.
3. Short money for a long machine. A cash advance for a machine that earns for ten years squeezes a decade's value into a year of repayments.

Limited companies only

Ask Sterling only introduces limited companies, because introducing sole traders and small partnerships is regulated credit broking. Business finance for limited companies is not regulated by the Financial Conduct Authority, so the agreement you sign is the protection you have. Read it.