What Is WIP Financing?
Posted July 1st, 2019
Does your manufacturing or fabricating business need additional funds to cover a cash flow pinch caused by a big order or a slow-paying customer? Work-in-Progress (WIP) financing is an important tool specific to the industry that may overcome these and other common cash flow challenges and better align with your business’s cash flow cycle than other funding options.
What Does Work-in-Progress Mean?
WIP is a production and supply-chain management term describing partially finished goods awaiting completion. WIP includes the different components that are built into the cost of the business’s products, such as:
- Allocated Overhead Costs
Let’s say your business manufactures kitchen cabinets and received a big order totaling $300,000. It will cost your business $100,000 for the wood, $25,000 for other materials and another $25,000 for payroll, for a grand total of $150,000 of allocated costs to that order. But your business only has $50,000 in cash available to pay for those costs, leaving you with a $100,000 shortage. WIP Financing will provide you with that $100,000 so that you can deliver those cabinets, get paid $300,000 and repay the loan.
How Does WIP Financing Work?
WIP financing is most often available to established businesses that have other receivables. It is not typically available for startup companies. In approving the WIP financing application, the lender will:
- Review the outstanding purchase order or other documentation from the client’s customer.
- Access the costs associated with producing the product (what the WIP financing needs are) and compare to the purchase order.
- Determine the amount of time needed for the Client to execute on the Purchase Order and Invoice their customer.
- Perform basic financial analysis of the overall company through the application process.
Upon approval of the loan, the lender will purchase the needed materials on behalf of the business. If for labor, the lender will verify the payroll costs and issue payment through the business’s standard payroll process.
With the cash flow problem taken care of, the client will then create the product. When the product is delivered or installed, the client’s customer will send the payment to the client’s lockbox account that the lender has created for them. The lender will then deduct the cost of the materials plus the interest and financing fees, and then pay the remaining balance to the client.
As a short-term funding option, WIP financing allows manufacturing businesses to grow and fulfill orders with a portion of their gross margin on the order rather than suffering through a cash flow pinch that could lead to delays or other issues.
Work-In-Progress (WIP) Financing is specifically designed for manufacturing companies that need additional funds for things like raw materials and labor costs, which are associated with the production of orders.
This product can also be referred to as a purchase order (PO) financing, however, can vary depending on the type of business and its needs. Other options available to manufacturing or fabricating companies include a line of credit, factoring, equipment loan or a Merchant Cash Advance (MCA). Click here to learn more about different loan options for your manufacturing business.
Do you have additional questions about WIP Financing or want to apply for WIP Financing? Contact a Mobilization Funding expert today at 813-712-3073 or click here.
If you enjoyed this article, we think you’ll love our newsletter. Click here to subscribe and you’ll receive business strategies, leadership advice, and the motivation to crush your goals — delivered right to your inbox!