← Business Metric: Industry Specific (Industrials & Materials) (all topics)
Working capital - customer advances
What it is
Steel pipe and project equipment makers negotiate customer advances alongside price, so the buyer funds raw material purchase and manufacture. It is standard in made-to-order pipe and project supply, and unavailable in commodity sales
It is typically negotiated alongside price, and its availability differs sharply between government, private and export customers
Impact on industries
- Structurally superior economics - a business funded by advances can grow without proportionate debt, which is rare in a steel conversion business
- Also a credit filter: a customer willing to pay in advance is demonstrating both intent and solvency before production begins
- Bargaining power determines availability, so it is strongest exactly when order books are full and weakest when the supplier most needs it
- Advances usually come with delivery and performance obligations, and can be reclaimed if execution slips, so they are liabilities as well as funding