How Factoring Receivables Benefits Distribution Companies
Distribution can be a great niche to move into in any marketplace. By servicing a large group of retailers and focusing on certain product niches or brands, you can move substantial volumes of inventory, often with less turn-around time than you would see on the retail side of the industry. Being in distribution has its own unique challenges, though. As a vendor, you are often expected to extend credit, and your own ability to keep inventory coming in is based on having to pay in advance. This dilemma is exactly the kind of situation that factoring receivables was built to handle, and using it as a financial planning solution for your company can really help you stay on track with your long-term growth plans.
What is Factoring?
Factoring is a form of small business financing that involves selling your invoices (or receivables) to a third party for cash. It is different from a loan, because there is generally no payment schedule to meet, but it does involve taking a discount from the face value of those invoices. Typically, factoring works by selling the receivables due during a certain time period, like a 45 day window from the date of the sale.
How to Use it in Distribution
Factoring receivables is particularly useful for companies that serve as vendors to other businesses because so many companies want to negotiate for credit. As you do that, adjusting your rates and terms to accommodate the costs of factoring can help you maintain your own profit margins while accommodating the customer. At the same time, the use of a factor will guarantee your own cash flow is unimpeded, allowing you to finance the new stock you need to keep operating.
Advantages Over Other Solutions
You can find other solutions to the credit cash flow issue that comes with running a distribution company. Loans, revolving credit lines, and other financial instruments can bridge the gap, but they show up on your credit report as debt. Factoring does not, since it is a form of cash advance and not a loan. Factoring receivables is a highly customized form of financing, too. This allows you to negotiate for terms, such as making the factor liable for debt collection, that are unavailable with loans, which require payment on time from you whether you receive your payments on time or not.
Part of the challenge of running a distribution company is finding ways to smooth over the supply and demand cycle, to be the stabilizing force that can help your customers succeed. Using factoring alongside your other financing solutions can really help with that, while also minimizing your debt profile and keeping your company ready to take advantage of every opportunity.