The work in process financing experience - what it's like

In this piece we're going to take a look at how a company would experience work in process funding (or work in process financing) from their perspective and what the experience would typically be for any manufacturing or assembly business.

Work in process is different.

With work in process financing, the lender is usually significantly more involved than with other forms of financing. This level of involvement starts with the assessment of the business and carries through to the execution of the entire transaction.

This is because the transaction itself is always going to be unique, and the terms of the transaction will differ depending on the company and its situation. So, the process will be different for any company but that doesn't mean that there are no significant similarities between transactions.

In fact, while the details of the execution of the transaction may differ from company to company, the overall experience remains the same.

Let's take a look at what that experience is like.

A challenging opportunity.

When companies start looking into work in process financing, they are usually presented with an opportunity that they can't take advantage of. This could be a new customer that has a large order, and may impact the future of the business significantly. Or it may be that the company is going through a difficult time, and has a customer lined up to change things, but does not have the funds to take action.

This is where work in process financing shines.

For the company that needs funds so it can grow and take on more demanding customers or larger orders, the question of growth depends on more than just being able to buy new inventory. More often than not it also depends on the ability to buy new machinery even hire more people to complete the order and be able to serve the customer in the future as well.

In the case of the company that's going through a rough time and needs funds to take on a new customer, the infrastructure may already be in place but they also may need to hire more people.

In both cases, the opportunity represents a brighter future and missing it is simply not an option.

When looking at what the company needs to succeed, the answer usually contains one or more of the following:

  1. Inventory to work on in the production or assembly process
  2. Machinery to complete the work needed
  3. New employees to work on the product
  4. Additional expenses related to the order

This is a tall order for most financing solutions, but since work in process financing usually combines multiple solutions to create a complete package to solve the problem of not being able to serve the new order, all of these can often be covered, and the order can still be completed.

That makes work in process financing a one stop solution for many manufacturing businesses or assembly businesses.

The assessment.

Before a company gets their work in process funding, the lender will need to verify a number of elements and ensure the risk isn't too high. Typically this assessment will cover three main areas to make a thorough assessment of the potential risk associated with the transaction.

1. Financials

The first step of the assessment is taking a look at the submitted financial information. This helps the lender understand the current situation the company is in, gives context to the needs of that company, and also allows the lender to understand the potential risk involved with this transaction.

If the lender sees no glaring issues at this stage, it makes sense to move forward and assess the remaining elements: The contract and the performance capability.

2. The contract

When you have a purchase order, there is going to be a contract attached to it. The structure of this contract and the ability to enforce it, will have a significant impact Arnie availability of work in process funding for your company.

The contract that outlines this purchase order will be assessed and will be used to determine the risk of this transaction.

3. Ability and relationships

In addition, the lender will also take a look at your company's ability to produce or assemble the ordered products according to the agreed upon standards, as well as your relationship with your existing suppliers.

Assessing the relationship your company has with its suppliers is essential to understand their ability to deliver the required inventory on time and within spec.

Assessing the production process on the other hand makes sure that the lender doesn't take on any unnecessary risks. Of course, if additional machinery is needed to complete the production, this will also be included in the assessment process.

Execution.

From here on out, the transaction can be executed. Since this is a manufacturing or assembly process, that means that taking this transaction to completion usually takes some time.

The lender will be involved or will monitor every step of the delivery process to make sure that everything is going as it should be going.

1. Purchasing inventory

The first step will be to purchase the needed inventory to produce or assemble the final product. The lender will assist with purchasing the inventory and in some cases may even help select the supplier to be used.

Usually, the lender will purchase the inventory for the company, but this depends upon the nature of the transaction.

2. Machinery and hiring

In Sync with the rest of the process, the company will also be able to hire the required staff as well as purchase the needed machinery. This will often be done with the help of additional financing products like equipment financing or other mechanisms.

Of course, what is included in this transaction will be defined in the who work in process contract on beforehand. With each step the lender will also be monitoring progress.

3. Production / assembly

When all resources are in place, the company can start producing or assembling the inventory and turn it into the final product. Of course, the amount of time that this process takes will be different for every company. Regardless, in each case the lender will keep a close eye on the process in the progress made towards the final delivery of the agreed upon product to the customer.

If there are any issues at this point, the company and the lender can sit together and decide on a way forward to make sure the transaction will be a success.

It doesn't stop there.

Often, companies will return to the lender to help them achieve more growth or simply repeat the process. in that case much of the assessment that was needed the first time is no longer needed.

Since the relationship has already been established and as long as the product hasn't changed and suppliers remain the same, the only remaining variable is the new customer if relevant.

At this point in time, funding a new purchase order can't take just a few days making work in process funding a great way to maintain a company's growth.

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