Wholesale companies are one of the most crucial links in the supply chain. They get their inventories from manufacturers and exporters, and in turn they supply the retailers and sellers with the products they need to sell to their customers.
The problem is that often the suppliers of wholesale companies require payment within a very short period of time. In fact, sometimes the suppliers want their money once the wholesale companies get the supplies from them. In contrast, their retailers tend to delay payment for the inventory for 30 to 90 days.
It’s for this reason why so many wholesale companies need large infusions of cash to operate smoothly. But if banks won’t give them the money they need to buy supplies and pay for other operating expenses, then they need to get the money through other means. With account receivable financing wholesale companies can get the cash flow they need for normal operations.
Types of Account Receivable Financing
Accounts receivable are assets wholesale companies can use to secure the financing they need.
One way is to use them as collateral for a loan in much the same way a homeowner can use their house or a car owner can use their car for security. The amount of the loan depends on the total value of the accounts receivable. The credit-worthiness of the wholesale company is assessed and the appropriate interest rate is charged for the loan. Much like other loans, there’s usually a monthly payment involved.
Another type of account receivable financing is called factoring. Technically, this is not actually a loan. It’s more like the sale of the accounts receivable to the factor. The factor then advances about 80% of the value of the accounts receivable to the wholesale company, and then send back the rest of the money (minus the factor’s fees) when the retailer has paid the money owed in full.
In most cases, factoring offers some additional services that are not part of traditional loans. Factoring doesn’t take into account the credit-worthiness of the wholesale company but only notes the credit-worthiness of the retailer instead. Because of this, a wholesale company can find out which retailers have an excellent reputation for paying fully and on time.
Factors also usually tend to the collection so the wholesaler may devote its full resources to making sure that their supplies are adequate for the needs of their retailers. There’s no need to spend additional capital for a collection department.
Benefits of Account Receivable Financing
The most important benefit of account receivable financing is that the wholesale company doesn’t have to wait too long before they can get their money. They can get it immediately, and use it right away to buy more products for their other retailer customers. The wholesale company can also use the money to pay for immediate needs, such as meeting payroll and paying for utility expenses.
Account receivable financing is also much easier to get compared to traditional bank loans. Bank loan applications take too much time, and the chances of actually getting a loan isn’t high. In contrast, approval for account receivable financing (especially factoring) is usually forthcoming and takes only a day or so.