So, you have a product, you have put in the R&D and are ready to start selling to some major retailers. The meetings have gone well, and they issue a large Purchase Order for your product. This is great news! But there are a few cash flow challenges that many new or growing companies run into when this type of scenario occurs.
- Coming up with the money to fulfill the order
- Waiting for the retailer to pay the invoice after the product has been delivered
In this article, we are going to discuss these two cash flow issues and how factoring can be a great solution for retail suppliers.
Having the Funds to Fulfill a Purchase Order
There is a cost to manufacturing and delivering a product to a retailer, many costs that are incurred far ahead of when a retailer receives the product, let alone, pays for the product. This can cause a cash flow problem for suppliers. There are a few main ways that a business can put together the funds to fulfill these orders such as selling equity, getting funds from an owner or ownership group, factoring current outstanding accounts receivable, getting a loan or utilizing letters of credit.
If this is an issue for your business, talk to a factoring company as they work with businesses in these situations often and are happy to help come up with a solution.
Why is waiting for the retailer to pay - such a challenge?
Retailers, in almost all cases, pay their invoices on terms. These are typically 45-90 days after they have received the product. This creates major challenges for suppliers as they generally need the funds from one sale to manufacture and ship subsequent orders, make payroll and pay other costs associated with running a business. This can be a major hurdle in the growth of a business and where factoring can be a great financing solution.
What is Factoring & How can it help?
Factoring is a transaction where a business sells its outstanding invoices or account receivables to a third-party finance company (invoice factoring company) to gain access to the capital that is tied up while waiting for a client to pay. This can be a great help as it enables business owners to re-invest in subsequent orders without having to wait months for their clients to pay outstanding invoices.
Here’s How it Works
Note: All advance rates and discount rates or fees are agreed upon while being set up.
Step 1: The business submits their invoices to the factoring company to receive 80% to 95% of the amount of the factored invoices the same or next day. For example, if you sell a $50,000 invoice and get a 90% advance, the business utilizing the factoring will receive $45,000.
Step 2: The invoice factoring company holds the remaining 10% or $5,000 as security until the payment of the invoice has been received.
Step 3: The factoring company collects payment over the next 30 to 90-day period depending on the clients’ payment terms.
Step 4: Once the payment has been received, the factor makes available to the business utilizing the factoring service, (the seller of the invoice), the remaining 10% less the factoring fee, which typically is between 1% and 3% of the total invoice value.
How to Qualify for Factoring
Although there are underwriting guidelines and documents factoring companies need to see to qualify a prospect, at its core, qualifying is fairly straight forward. Factoring companies are typically looking for the following criteria:
- The invoices that the retail suppliers are submitting to the factor for funding are for a product that has been delivered and accepted.
- The customer or retailer is a credit-worthy client. (We can expect that they are able to pay the invoice.)
Factoring companies do not need their clients to have a certain amount of time in business or owners with particular credit scores. If the above two criteria are met, the business will likely qualify for invoice factoring.
Advantages of Factoring
Utilizing factoring as a financing solution has many advantages. Some of them being the following:
- Ongoing Cash Flow Solution
- Almost Instant Cash Flow Solution
- Enables Growth
- Businesses don’t have to take on Debt
- Works for Startups
- Accessible in a tough lending environment
What Does Factoring Cost?
The cost of factoring is very much dependent on the situation of each factoring client. Factoring companies have to determine the risk involved, the volume of factoring required, and many more things to determine what will make sense.
Typically, the cost of factoring will range between 1-2% of the invoice value for every 30 days it remains outstanding. So, if a factoring company funds an invoice worth $100K and the customer takes 30 days to pay the invoices, typically, the cost is between 1-2% or $1-2K, at 60 days 2-4% or $2-4K and 90 days 3-6% or $3-6K.
If you would like to get a quote for your business, factoring companies can usually turn these around quickly once an application is filled out.
How to Get Set-Up
Getting set-up and ready for factoring typically takes 1-3 weeks. The process involves:
- Filling out an application
- Agreeing to terms – whether verbally or through a written proposal
- Signing a contract
- Submitting invoices and any backup documentation for funding
At this point, the factoring company will verify that the invoices are good and that the customers are going to make direct payments to the appropriate lockbox.
Now you are ready, have the financing in place to scale and grow at the pace that your product deserves, and are not hindered by cash flow!
Factoring by Meritus Capital
If you have any further questions about factoring financing, feel free to reach out to us here at Meritus Capital anytime by email at firstname.lastname@example.org or call us toll-free at 1-877-648-3709. We have been providing factoring services to businesses across the U.S and Canada for almost 20 years!