A manufacturer buys material, pays wages, runs the plant and ships finished goods, all before an invoice is raised. Then the customer receives the shipment, inspects it, matches it to a purchase order and only then starts the payment clock.
How manufacturing invoicing works
Most production runs against a purchase order, sometimes a blanket order with scheduled releases. The invoice references that order, the shipment references a packing slip, and the customer's receiving department confirms what actually arrived. Payment depends on all three matching.
Where they do not match, the invoice is held. A quantity difference, a missing reference or a shipment split across two deliveries is enough to send it back to the supplier's office, and the payment cycle restarts when the corrected invoice arrives.
Why receivables build up
- Raw material is paid for long before the finished goods are shipped.
- Blanket orders ship in releases, so invoicing is spread across a schedule.
- Receiving and inspection take time, and the payment clock starts after them.
- Tooling, set up and engineering costs are often recovered later, if at all.
- A single large customer can represent a month of production.
Quality holds and chargebacks
Manufacturing customers deduct. A batch that fails inspection, a delivery that arrives late or a packaging specification that changed can all produce a chargeback, and chargebacks frequently appear weeks after the invoice was accepted.
For a funding provider, a chargeback is a reduction in what the invoice is worth. That is why a provider will ask about your record on quality and delivery, and why a manufacturer with clean, consistent documentation usually finds the arrangement easier to operate.
How factoring is used
Factoring is applied to shipped, accepted invoices. The manufacturer sells the invoice once the receiving record exists, receives an advance, and the provider collects from the customer. Because manufacturing invoices tend to be larger and less frequent than freight invoices, the per invoice review is more detailed.
Many manufacturers use a whole-ledger arrangement, since the gap between material cost and customer payment recurs on every order rather than appearing occasionally.
Sector cautions
- Warranty claims and returns, which can arrive long after payment.
- Quality holds that freeze an invoice without formally disputing it.
- Customer concentration, particularly with one large original equipment manufacturer.
- Contracts that restrict assignment or require the customer's consent.
- Work in progress, which a factoring arrangement does not fund.
Questions to ask a provider
- Do you require a receiving record as well as the invoice?
- How are chargebacks handled after an invoice is bought?
- Will you buy invoices from my largest customer, and up to what limit?
- Is there a minimum invoice size or monthly volume?
- Is the arrangement recourse or non-recourse?
Related guides
See recourse and non-recourse factoring for the risk question, and full turnover factoring for the whole-ledger structure. Provincial context sits in the Ontario and Quebec guides. The process is explained in how invoice factoring works.