On the face of it, the role of wholesalers is simple enough. Wholesalers buy supplies from manufacturers and exporters, and then they sell and deliver these items to their retailer customers. Wholesalers earn profits because the overall cost of the supplies is less than what they charge their customers.
The most typical problem here is that retailers do not usually pay cash on delivery. Usually, retailers want 30 days or even more before they pay for their orders in full.
Meanwhile, the wholesalers still have immediate expenses to pay for. Aside from paying for the inventory, there are warehousing expenses, delivery expenses, payroll, and utility bills. When retailers delay their payments, this can leave wholesalers in a lurch, and they have to start looking for financing to fund their expenses.
With account receivable financing wholesalers can now get the money they need when they need it. There are several advantages here which wholesalers can fully appreciate:
- Wholesalers don’t really incur additional debt. This applies to factoring, which is basically selling invoices at a discount. With factoring, wholesalers can get a percentage of the value of the invoice right away instead of having to wait 30 or sometimes even 90 days.
- Wholesalers don’t give up equity stake in the companies. Some business give up a percentage of the company for cash, but with factoring this is no longer necessary.
- Factors can handle collection. You’re then spared the expense of having to set up a collection department of your own. Factors can even manage the accounts receivable, so the wholesaler can see the state of the accounts receivable online in real time.
That’s how factoring work. They take over the collection duties and forward you the rest of the money (after the advance) after the factor has deducted its fees).
- Factors offer convenient investigative services. Factors evaluate the credit-worthiness of the retailers rather than the credit of the wholesalers. The wholesalers can then use this info to determine which retailers to whom they can offer credit.
- The money can be used for a wide variety of purposes. With the advance money, a wholesaler can go after larger contracts because it has the means to buy the quantity necessary. Wholesalers can also negotiate for discounts from their suppliers because of their new-found ability to pay for supplies more quickly.
Of course, the money can also be used to pay for essential operational expenses, such as utility bills and payroll.
- Account Receivable Financing is very quick. It only takes a day or two to get approval, and setting up the factoring line usually requires only about a week. This is a substantial improvement over the plodding loan application procedure used by banks. And banks are notorious for rejecting a large number of loan applications from small businesses.
With account receivable financing, wholesalers in need of cash can quickly get the money they need to operate more efficiently and more profitably.