Wholesale distribution is a key link in the supply chain that connects manufacturers with their end-customers. It can be a very complex business to move product, requiring flexibility and fast response times while operating at the highest levels of accuracy and efficiency. Central to being able to maintain such levels while keeping options open for growth opportunities is a manageable and predictable cash flow. That can be a tall order for fledgling wholesale distributors when they have to wait 60 or 90 days for invoice payments while meeting the current demand for deliveries. It can certainly be a limiting factor when considering growth opportunities. Therefore wholesale invoice factoring offers a great solution to alleviate cash shortfalls.
The Time Lag Dilemma for Wholesale Distributors
Small- to medium sized wholesale distributors almost always operate with a lengthy time lag between the time they pay for goods to be sold and the time they receive payment from their end-customers. In many cases, the products are purchased on a cash-only basis or with very short payment terms. On the other end, they are often forced to negotiate favorable payment terms of net-30 to net-90 days with their customers.
Depending on the time it takes to receive products, collect orders and ship the products, the time lag can stretch as far as three or four months between the distributors cash outflow and its cash inflow on a particular order of goods. In the meantime, the distributor must meet the on-going demand of other customers. The receivables time lag can be especially pronounced during slow seasons when distributors rely heavily on steady cash flow to cover ongoing operating costs. However, it can cause more lasting damage during busy seasons when distributors lack sufficient capital to take on larger orders or add new customers.
Whole Invoice Factoring Beats Traditional Financing
Unfortunately for many small distributors, access to traditional sources of financing is limited at best. Banks aren’t likely to lend to smaller distributors experiencing uneven cash flow. However, bank loan products with their rigid terms are not ideally suited for wholesale distributors. They may need more flexibility in meeting their financing needs. Besides, the last thing a business with uneven cash flow needs is additional debt obligations. For these reasons, an alternative financing vehicle, called invoice factoring, is quickly becoming the preferred option for wholesale distributors.
How Wholesale Invoice Factoring Works
Wholesale invoice factoring has been used by business owners for many years to assist with cash flow needs. By selling invoices, a business owner can convert accounts receivable into immediate cash. With just a few simple steps, the business has immediate use of the money it would otherwise not have. Once a business sets up wholesale invoice financing, the process is a straightforward transaction that can be repeated as often as necessary.
- The business submits a copy of an invoice to the factoring company.
- The factoring company reviews the invoice and verifies the value provided.
- Within two or three days, the factoring company direct deposits a cash advance of up to 80% of the invoice value into the business’ bank account.
- The balance is held on reserve by the factoring company until the transaction is complete.
- When the factoring company receives payment under the original terms of the invoice, it pays the balance reserve to the business less a factoring fee of 1 to 3% to complete the transaction.
The Many Advantages of Wholesale Invoice Factoring
Having immediate and unlimited access to funds addresses the major challenge of uneven cash flow. However, the benefits of wholesale invoice financing go way beyond quick money.
- Accounts receivable factoring does not add debt or require monthly payments.
- The factoring companies rely on the creditworthiness of the invoiced customers. Therefore there is no credit qualification to establish an account. Additionally the factor takes the risk of non-payment.
- Businesses can control financing costs but selling invoices whenever needed.
- The only limit on the amount factored is the invoice size itself. So, as the business grows so too can the cash advances. Typically the advance rate is up to 80-90% of the invoice amount.
- The simplicity, reliability and flexibility of wholesale invoice factoring enables wholesale distributors to control their finances.
Wholesale Invoice Factoring: How To Get Started
Unlike traditional forms of financing, there is no lengthy application and approval process. Setting up a wholesale invoice factoring account is a fairly simple process. After the business owner completes the application, the account is generally approved within a few business days. Although there are no credit qualifications, the factoring company will review the business’ financial management and invoice process. It will also screen the credit backgrounds of the business’ customers. The only “disqualifier” is if the business has any outstanding tax liens or other financial encumbrances. The business owner can send invoices as needed and receive funds, once the facility is established.
It’s possible a business may only need to use invoice factoring once or twice to address a particularly difficult cash crunch. However, many companies use invoice factoring routinely to improve their financial management. Establishing a relationship with a factoring company ensures fast and reliable funding. That said, invoice factoring may not be your best option. You should definitely thoroughly research every small business funding option available, including PO financing and a merchant cash advance.