Invoice factoring simplifies cash flow management and eases burden of managing accounts receivable
Wholesale and distribution companies often operate with lower gross margins. So, the pressure is on to turn around inventory fast. But, sometimes, customers fail to pay sales invoices on time. And that can leave a cash flow shortage that can lead to stock replenishment problems.
The time it takes to turn current assets into cash is known as the working capital cycle. And shortening the working capital cycle is only one of the benefits that invoice factoring has for wholesale businesses.
Invoice factoring is an off-balance-sheet method of financing working capital. Factoring involves selling sales invoices to a factor. The factoring company buys invoices at face value, less a small fee. The end-customer then pays the factoring company the total value of the invoice.
Also known as accounts receivable financing, invoice factoring provides businesses with cash from sales invoices almost immediately. And that speeding up collections of accounts receivable (AR) has some significant benefits for wholesale and distribution companies.
Replenish Inventory Faster
The turnaround of inventory is a critical factor in the profitability of a wholesale business. Retailers, for example, expect wholesalers to be able to ship the goods they need to restock their shelves. And, if a wholesaler cannot fulfill an order, retailers will find another wholesaler who can. So, if a cash flow shortage delays inventory replenishment, the wholesaler will lose sales and possibly customers.
Invoice factoring ensures that most of the cash from sales is immediately available. So, as the stock goes out the door, the funds are immediately available to replace the sold items. This increased availability of cash allows wholesalers to get close to just-in-time purchasing and ensures a continuous supply of products.
Related: Is Invoice Factoring Right for Your Business?
Negotiate Better Deals with Vendors
The cash released by accounts receivable factoring will enable a wholesale business to pay vendors on time or early. And prompt payment of accounts payable (AP) gives businesses more leverage when negotiating prices with vendors. So, it is likely that factoring for a wholesale and distribution company would lead to lower unit costs of products sold. And, of course, that means higher gross margins.
Increase Available Working Capital
The benefits of factoring for wholesale and distribution companies are not limited to faster stock replenishments. The increased availability of cash can also be an advantage in other aspects of the business. With more working capital available in cash, a company can fund expansion, negotiate better deals with overhead suppliers, and, perhaps, invest in new technology.
Reduce Accounts Receivable Administration Costs
Factoring companies can also take on the administration of accounts receivable. The administrative tasks will usually include credit checking new customers, making collection calls, and sending customer statements and reminders. So, outsourcing accounts receivable to a factoring company saves money on finance staff costs and the general costs associated with managing accounts receivable.
Related: How Much Are Your Accounts Receivable Costing You?
Reduce Borrowing
A factoring company buys sales invoices from its clients. So, the financing is not treated as a loan in the balance sheet. But the cushion of cash that factoring provides could enable a company to repay some loans that appear in the balance sheet. So, in addition to improving cash flow, invoice factoring can reduce loan interest and strengthen the balance sheet of a business.
Manage Seasonal Sales Fluctuations
The amount of cash advanced by a factoring company depends solely on the value of sales invoices raised. As a company’s turnover increases, so too do the funds available from invoice financing. So, a wholesale business has extra cash right when it is needed during peak periods. And, the funding reduces, along with the associated costs, during off-peak periods.
Related: 10 Considerations When Selecting the Best Factoring Company for Your Business
Simplify Cash Flow Management
One of the most unpredictable elements of cash flow forecasts is the AR receipts. And, if one or more customers decide to pay late, it can significantly impact plans to pay vendors. When a company factors sales invoices, though, the receipt of most of the value of an invoice is guaranteed. So, cash flow management and vendor payment planning become straightforward.
The Bottom Line
To sum up, sales invoice factoring significantly increases the availability of cash in a business. So, wholesale and distribution companies can benefit from faster inventory replenishment and negotiate better prices from vendors. Factoring also simplifies cash flow management and removes the administrative burden of managing accounts receivable.
Your Questions Answered Quickly
Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
About Universal Funding
Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.
