A precision engineering firm buying £40,000 of aluminium billet on 30-day terms, machining it over six weeks and shipping to an automotive tier-one on 90-day terms has paid its supplier about four months before it sees the sale proceeds. Across a full order book, the working-capital requirement of a growing manufacturer can exceed its annual profit several times over.
The production cycle and where the cash sits
Manufacturing ties up cash at every stage between purchase order and bank receipt. Seen as a chain of cash commitments, it shows why the sector leans on invoice finance.
Suppliers of metals, resins, components and packaging want 30 days and put accounts on stop quickly. Customers expect 60 days as standard and 90 or more if they are a large OEM, a supermarket or a public body. Add goods-inwards inspection and the customer's approval cycle, and 100 to 120 days from paying for material to receiving payment is not unusual.
What can and cannot be funded
The single most important point for a manufacturer is that invoice finance funds invoices, not production.
| Asset | Invoice finance (factoring or discounting) | Asset-based lending (ABL) |
|---|---|---|
| Invoices for delivered, accepted goods | Fundable, typically 70% to 90% of value. | Fundable on the same basis. |
| Sale-or-return, consignment or call-off stock | Usually excluded until the sale is final. | As invoice finance. |
| Work in progress | Not fundable; there is no invoice. | Rarely funded; some lenders consider WIP against firm orders. |
| Raw materials and finished stock | Not fundable. | Often fundable at a conservative percentage of liquidation value, after a stock audit. |
| Plant, machinery and tooling | Not fundable. | Fundable against a valuation, or via separate hire purchase or refinance. |
Asset-based lending (ABL): a facility combining invoice finance with lending against stock, plant and machinery and sometimes property, under one agreement. Typically available from around £5m turnover with strong financial reporting.
Pro-forma and deposit invoices and invoices raised before delivery are not fundable either; providers verify a sample against delivery notes or goods-received confirmations.
Export debtors and credit insurance
Overseas customers are harder for a provider to assess and chase. Some providers fund export debtors in sterling, euros and US dollars with no special conditions beyond a credit limit. Many require credit insurance on export debtors, either their own policy or yours assigned to them. Others restrict countries, apply lower advance rates, or exclude export debt entirely, which matters if a third of your ledger is in Germany. Where the facility is non-recourse or includes bad debt protection, overseas cover often carries country limits and a higher premium. An existing trade credit policy is usually worth keeping alongside the facility.
Retention of title and its effect on providers
Most suppliers of materials and components sell under a retention of title (ROT) clause: goods remain the supplier's property until paid for in full. Some clauses also claim the proceeds of sale or any product into which the materials have been incorporated. ROT matters because, in an insolvency, a supplier with an effective claim can recover unpaid materials or the goods made from them, cutting across the provider's security; invoices for goods sold while the underlying material is unpaid may therefore be discounted or excluded. Expect the provider to review your main suppliers' terms at set-up and to ask for an aged creditor report. Keeping key suppliers within terms is the practical answer.
Large customer concentration
Supplying automotive, aerospace, food retail or DIY multiples usually means a short customer list, with one OEM or supermarket at 50% to 80% of turnover. Standard concentration limits of 25% to 30% would leave most of that unfunded, so providers who work with manufacturers routinely agree higher limits for a strong, well-rated customer, often on condition that it is credit-insured. The flip side is that a move by that customer from 60 to 90-day terms directly cuts your headroom.
Seasonal demand, tooling and capital expenditure
Makers of garden products, toys or seasonal food build stock for months ahead of the selling season. Invoice finance offers little during the build, because there are no invoices, then a surge of funding when despatches begin. The options are an ABL stock line, separate stock finance, or sizing the facility so the season's invoicing can be fully drawn.
Tooling and machinery are better matched to asset finance (hire purchase or leasing) than to a facility designed to fund 60 to 90 days of sales; many manufacturers run invoice discounting for working capital and hire purchase for capex. Customer-funded tooling can be invoiced and funded once signed off, but not before.
Eligibility for manufacturers
- Limited company or LLP; minimum turnover often from around £250,000 for factoring, £500,000 for discounting, £5m for ABL.
- Business customers on credit terms, with delivery evidenced by signed notes, GRNs or EDI confirmations.
- Goods sold outright, not on consignment or sale-or-return.
- Reasonable dispute and credit-note history; frequent quality claims reduce fundable value.
- Creditors broadly within terms, so retention of title does not undermine the ledger.
Bespoke equipment builders invoicing in stages and carrying WIP for months are better served by the approach in our engineering guide. See the general eligibility criteria for what applies everywhere.
Costs and limitations
Manufacturers with good customers tend to be quoted towards the lower end of published market ranges: service fees of roughly 0.3% to 1% of turnover for discounting and 0.75% to 2% for factoring, with discount charges of about 1.5% to 4% over base rate or SONIA on funds drawn. ABL adds audit and stock valuation fees. Long terms increase the discount charge: 90-day debt costs roughly three times as much as 30-day debt for the same invoice. Fees vary by provider, so use the costs guide and the factoring calculator to model your own figures.
Advantages
- Bridges 60 to 90-day customer terms without a fixed loan.
- Lets you pay suppliers early and negotiate settlement discounts.
- Scales with sales as orders ship; ABL can extend to stock and plant.
Disadvantages
- Nothing is funded until goods are invoiced; WIP and stock sit outside.
- Export debtors may be restricted or require insurance.
- Heavy concentration leaves you exposed to one customer's behaviour.
- Credit notes and quality claims reduce funded value after the event.
Worked example: a component manufacturer on 90-day terms
Illustrative example Single invoice to an automotive tier-one customer
- Invoice value (delivered, EDI-confirmed)
- £60,000.00
- Initial advance (85%)
- £51,000.00
- Service fee (1% of invoice value)
- £600.00
- Discount charge (90 days at 3% over base, base assumed 4%)
- £880.00
- Balance released when the customer pays (day 90)
- £7,520.00
Figures are illustrative estimates only and do not represent a finance offer.
Total charges of £1,480 are about 2.5% of the invoice; against that, £51,000 arrives roughly 88 days early. A £3,000 credit note for a short delivery would be deducted from the balance, leaving £4,520.
Paying suppliers months before customers pay you?
Tell us about your customers, terms and export mix and we will explain which invoice finance or ABL structures may be worth enquiring about.
Frequently asked questions
Can a manufacturer get funding against work in progress or stock?
Not through invoice finance alone, which advances only against invoices for goods delivered and accepted. Raw materials, work in progress and finished goods on the shop floor are not invoiced, so they are not fundable. An asset-based lending structure can add a stock line, usually at a conservative percentage of net orderly liquidation value, alongside the receivables facility.
Are export invoices fundable?
Often, but not with every provider. Those that fund export debtors usually want the overseas customer credit-insured, under their policy or yours, and may restrict countries and currencies or apply lower advance rates. Letters of credit and open-account terms are treated differently, so describe your export arrangements at the enquiry stage.
What is retention of title and why does it matter to a provider?
A retention of title clause says goods remain the supplier's property until paid for. If a manufacturer fails, the supplier can try to reclaim unpaid materials and sometimes sale proceeds, which conflicts with the provider's rights over invoices and stock. Providers review suppliers' terms and may exclude or discount invoices for goods still subject to such a claim.
My biggest customer is 60 per cent of turnover. Is that a problem?
It can be. Many providers apply a concentration limit of around 25 to 30 per cent per debtor, above which invoices are collected but not advanced against. Providers familiar with automotive and retail supply chains often agree much higher limits for a strong, credit-insured customer, and bad debt protection on that customer is frequently a condition.
Can invoice finance be combined with asset finance for new machinery?
Yes, and they are often used together. Invoice finance funds the working-capital gap created by payment terms; hire purchase, leasing or a refinance of existing plant funds equipment and tooling over its useful life. Some providers offer both under an asset-based lending umbrella; otherwise the two lenders agree how security over specific machines is shared.
Next steps
Prepare aged debtor and creditor reports, your top suppliers' terms and a note of export customers and existing credit insurance. If a customer is already overdue, read what happens if a customer does not pay. Then request a quote or compare how other industries are treated.