![]() As a company’s turnover increases, so too do the funds available from invoice financing. The amount of cash advanced by a factoring company depends solely on the value of sales invoices raised. So, in addition to improving cash flow, invoice factoring can reduce loan interest and strengthen the balance sheet of a business. But the cushion of cash that factoring provides could enable a company to repay some loans that appear in the balance sheet. So, the financing is not treated as a loan in the balance sheet. Related: How Much Are Your Accounts Receivable Costing You? Reduce BorrowingĪ factoring company buys sales invoices from its clients. So, outsourcing accounts receivable to a factoring company saves money on finance staff costs and the general costs associated with managing accounts receivable. The administrative tasks will usually include credit checking new customers, making collection calls, and sending customer statements and reminders. Reduce Accounts Receivable Administration Costsįactoring companies can also take on the administration of accounts receivable. With more working capital available in cash, a company can fund expansion, negotiate better deals with overhead suppliers, and, perhaps, invest in new technology. The increased availability of cash can also be an advantage in other aspects of the business. The benefits of factoring for wholesale and distribution companies are not limited to faster stock replenishments. And, of course, that means higher gross margins. So, it is likely that factoring for a wholesale and distribution company would lead to lower unit costs of products sold. And prompt payment of accounts payable (AP) gives businesses more leverage when negotiating prices with vendors. The cash released by accounts receivable factoring will enable a wholesale business to pay vendors on time or early. Related: Is Invoice Factoring Right for Your Business? Negotiate Better Deals with Vendors This increased availability of cash allows wholesalers to get close to just-in-time purchasing and ensures a continuous supply of products. So, as the stock goes out the door, the funds are immediately available to replace the sold items. Invoice factoring ensures that most of the cash from sales is immediately available. So, if a cash flow shortage delays inventory replenishment, the wholesaler will lose sales and possibly customers. And, if a wholesaler cannot fulfill an order, retailers will find another wholesaler who can. Retailers, for example, expect wholesalers to be able to ship the goods they need to restock their shelves. The turnaround of inventory is a critical factor in the profitability of a wholesale business. And that speeding up collections of accounts receivable (AR) has some significant benefits for wholesale and distribution companies. The end-customer then pays the factoring company the total value of the invoice.Īlso known as accounts receivable financing, invoice factoring provides businesses with cash from sales invoices almost immediately. The factoring company buys invoices at face value, less a small fee. Factoring involves selling sales invoices to a factor. Invoice factoring is an off-balance-sheet method of financing working capital. And shortening the working capital cycle is only one of the benefits that invoice factoring has for wholesale businesses. The time it takes to turn current assets into cash is known as the working capital cycle. And that can leave a cash flow shortage that can lead to stock replenishment problems. But, sometimes, customers fail to pay sales invoices on time. So, the pressure is on to turn around inventory fast. ![]() Wholesale and distribution companies often operate with lower gross margins. Invoice factoring simplifies cash flow management and eases burden of managing accounts receivable
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