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A fast moving inventory incurs less damage, is easier to track and less expensive to manage than an inventory full of slow moving products. However, financing that inventory is critical. For instance, your company could have net-30 day terms with vendors, while your customers take 60, 90 or even 120 days to pay their invoices. This gap between your payables and receivables can quickly move a fast moving inventory into a slow moving one. So what can you do when financing becomes an issue? Well, many companies are turning to receivables factoring in order to keep their inventory moving, and their customers happy.
Granted, banks are starting to advance credit to businesses. However, the solution they provide is often limited to the “safest” of borrowers. This all but eliminates a number of companies. So what does a bank consider safe? The answer to this question involves understanding how banks approve companies for loans and capital advances.
First, you will need to provide financials. Next, you'll need to show consistent sales performance over the past couple of years. Most companies fail this step immediately. After all, how can a company show solid performance given how poorly the economy has been during the previous five years? Assuming you've passed this step, you'll then then need to go through a process where your credit rating and history are scrutinized. In the end, even if you do qualify for credit, the amount you secure is likely to come with a number of strings attached. This is where receivables factoring can help.
Receivable factoring is an asset-based financing solution. This solution allows your company to use its receivables in order to establish a rolling credit line with a financing company. You'll secure the capital you need to keep your inventory moving, while your customers will continue to get the products they need on time, every time. You'll also avoid the hassles of long receivable collection times, and most importantly, you'll be able eliminate the going concern of cash flow. Now the question becomes: How does the receivables factoring solution work?
Every time your company generates an invoice, you immediately forward it to a factoring company. They review the account debtor's (customer's) credit rating, history and payment performance. Once the assessment is complete, and your customer is approved, the factoring company forwards you a percentage of the invoice's value. That advance can be as high as 80 to 90 percent. The factoring company then owns the right to collect on the invoice. Your customer pays the factoring company directly. Once the transaction is completed, your company is credited the remaining portion on the invoice. Finally, your account is assessed some fees for the factoring company's services.
The costs to carry inventory are often misunderstood. These costs don't just include the costs of financing; they also include the costs of damage, obsolescence, pilferage, insurance, inventory counting and tracking, in addition to a number of other variables too numerous to mention. The simple rule to remember is that these costs increase with time. The longer you retain inventory in your warehouse, the higher the costs. Ultimately, it's all about keeping that inventory moving and keeping vendors shipping. However, when financing does become a concern, then take the time to investigate receivables factoring.