As a business owner, you may agree that the biggest challenge is maintaining cash flow. You know that cash flow plays a crucial role in any business’ success. In fact, if a business is lacking the money to pay suppliers, lenders, and employees, it cannot survive. Distribution companies and wholesalers, which often act as intermediaries between suppliers, manufacturers and their end users, usually have large cash flow needs. Projecting working capital needs is the key as it serves as an accurate forecast for operational the business’ cash flow needs and identifies future shortages. Working capital (equals current assets minus current liabilities) is one way to measure cash flow. However, Distributors and wholesalers can’t blindly rely on the working capital formula to project their needs. If inventory does not sell as quickly as anticipated, a distributor could have high levels of inventory and low levels of cash. Therefore, companies must choose the right funding solution to boost their cash inflow and working capital as well as support their survival and growth. Non-recourse invoice Factoring can be the perfect answer to the cash flow needs of distributors and wholesalers.
How does factoring apply to distributors and wholesalers?
Factoring also referred to as Invoice Factoring or AR Factoring, is a branch of debtor finance that generates a financial transaction in which a factoring company buys good invoices from a business at a discounted price. The factor can offer same day funding by providing an upfront payment to the business, up to 90%, based on the invoices amount and depending on the industry. End customers are notified that on due time, the factoring company is to receive payment. Once the money is received, the factor returns the remaining balance to the business client minus the already procured amount and service fees. Therefore, Invoice factoring not only supports businesses to retain a continuously available steady cash flow but also enables them to take advantage of growth opportunities. There are two existing ways to factor: Recourse Factoring and Non-Recourse Factoring. Distinguishing between these two ways is very crucial when you are a distributor or a wholesaler.
How does non-recourse factoring work?
Non-recourse factoring induces that the factor accepts more of the non-payment risk by your customers. Typically, the Factoring Company provides you with a credit guarantee that they are held responsible for the collection of your invoices; either all of them or just those from specific clients. Besides, this guarantee is valid in case your client files for bankruptcy. However, it is crucial to understand that you are not protected for disputed goods or services by your customers for not meeting specific requirements neither from unusual slow payments. Nonetheless, this “guarantee” or “insurance policy” against bankruptcy is vital for your own survival. Many thriving companies have ended up filing bankruptcy and you never know which one of your clients can be subject to it.
How is non-recourse factoring suitable for distributors and wholesalers?
If you decide to opt for non-recourse factoring, as a distributor or wholesaler, along with providing you with instant continuous working capital based on your accounts receivables, your factor is also engaged to take on full responsibility when buying your invoices and will then take the risk of bad debt; meaning that the factoring company is in charge and will have to take action if your clients default or fail to pay in agreed due times. This is beneficial for distributors and wholesalers, as they have large cash inflow needs but usually lacks the time to take on the responsibility of collections. Once your invoices are sold to the factoring company via non-recourse factoring, you are not liable to cover any cost of your clients’ non-payment issues. You won’t have to worry about buying back any invoice from the factoring company if it is left uncovered; meaning that the upfront payment advance you receive on your invoices is 100% credit risk-free.
At BusinessCash, we look at the creditworthiness of your clients and we can handle client concentration issues. We also offer Purchase Order funding and credit guarantees to fund the first step in your business and growth.
Key Invoice Factoring features for Distributors & Wholesalers:
- Same Day Funding;
- No dollar limits;
- Available working capital;
- No extra debts;
- Not liable for covering the cash advance for unpaid invoices;
- Insure away Client bankruptcy risk;
- Take supplier discounts;
- Won’t encumber other assets;
- The factor is at risk for bad debt.