Cash flow can be a main problem for wholesale businesses, particularly small and midsize ones. This problem develops from two factors:
1. The wholesaler’s client needs product quickly; and
2. The wholesaler’s client can’t pay the billed invoice immediately. Payment can take anywhere from 30 to 60 to 90 days.
The demand of product and the lack of pay do not work well together. This problem can put tremendous strain on a wholesaler.
What is wholesaler (small, midsize, or otherwise) supposed to do? The wholesaler can ask its client to pay earlier, but this solution is problematic. The client would need to be consistent with early payments in order for the wholesaler to rely on these payments. The wholesaler can't depend on that. The client might be busy with other business needs that prevent an earlier payment or the client might just be slow at paying its bills.
The option that seems to fit best is invoice factoring.
What Is Invoice Factoring?
Invoice factoring is designed specifically for wholesaler cash flow problems. Invoice factoring, or simply factoring, works as a link between the wholesaler and its client. Factoring companies ensure immediate payment to the wholesaler. Thus, the wholesaler receives immediate capital and can resume normal business without feeling any financial strain.
How Invoice Factoring Works
Invoice factoring involves a step-by-step process, which often works this way:
- The wholesaler delivers the goods or services to its client
- The wholesaler submits an invoice
- The factoring company advances 80% of the invoice (this amount can vary)
- The client pays after a 30-90 day period
- The factoring company issues a rebate to the wholesaler for the remaining 20% of the invoice after the client has paid
For qualification, the wholesaler must:
- Be free from any legal problems or tax problems
- Invoice for completed work
- Have unencumbered invoices
Additionally, the wholesaler’s clients must have good commercial credit since their credit is essentially the collateral for the factoring company.
The Benefits of Factoring
The conventional methods of business finance are problematic for wholesalers. Invoice factoring beats them out and provides many benefits for the wholesaler. These include:
- Improvements to cash flow. A constant flow of revenue helps wholesalers. This provides them with money for the business expenses they need to cover, such as payroll and vendor payments.
- An easier time obtaining. Invoice factoring is an easier process. The application process is simpler and faster than applying for a business loan.
- A growing line. The quick money can help a business grow. The financial stability can help the wholesaler expand operations by gaining more clients and generating more sales.
- Better chance with small businesses. Factoring companies are happy to work with small businesses. As long as the small business has clients with good credit, factoring gives them a greater chance to succeed.
- Minimization of bad business. One key factor separates a factoring company from a loan provider: they can provide some business-to-business advice. Since these factoring companies are dealing with the wholesaler's clients, they can help review the creditworthiness of the wholesaler's clients and help the wholesaler improve their billing practices. This can lead to fewer bad write-offs for the wholesaler.
Should Wholesalers Consider Factoring?
The conventional financing methods have too much risk involved. They can have a negative impact on a wholesaler's business and credit line, potentially killing off work and access to future credit. Any wholesaler, especially small and midsize, should consider factoring. The factoring benefits eliminate problems created by the conventional finance methods.
A wholesaler has different needs and goals. If factoring seems to be a fit, there are many factoring companies out there with different rates and services.