Wholesale companies are one of the many types of firms which make use of account receivable financing. With account receivable financing wholesale companies can get the working capital they need to pay their suppliers while still being able to allow their retailer clients to pay in 30 or even 60 days.
This type of finance is usually a much better option than applying for a loan or a line of credit from a bank. Bank loan applications are usually rejected.
How Account Receivable Financing Works
The basic concept of account receivable financing is quite simple. Let’s say for example that you have an invoice worth $100,000 which your retailer will pay in full in 60 days. You can present the invoice to your finance company and they can give you up to $80,000 in just 1-2 days. You can use that money to cover your company’s expenses, such as paying your suppliers for your subsequent orders. Once the customer pays in 60 days, the finance company will give you the rest of the payment minus the charges/fees.
Of course, the details of the transaction will differ depending on the finance company you talk to and your invoice. For example, some finance companies can take care of invoices totaling anywhere from $50,000 to $1 million. On the other hand, a larger finance institution such as Wells Fargo may take you as a client if your business has an annual revenue of at least $1 million.
The advance may vary (it can be 70% to 90%) and so will the fees.
Account Receivable Financing Vs. Factoring
Account receivable financing is an asset based loan. You are using your invoices as collateral for the loan you receive. The fees the factor take can be regarded as the interest you pay for the loan.
Since the money you receive in advance is a loan, you are then required to pay for it should your customer fail to pay off the amount owed. In other words, you have to pay back the advance and perhaps even pay interest on it.
There is a type of financing like this called factoring, but it involves virtually the sale of the invoice. It’s not exactly a loan, because you’re not supposed to pay the factor. The factoring company takes over the responsibility of the invoice, and if the retail client doesn’t pay then you don’t have to return the advance as well.
There are many variations in the account receivable financing wholesale companies can get. Sometimes, the agreement that you don’t have to return the advance is in effect only if the retailer declares bankruptcy. But if they refuse to pay because they alleged that you did not fulfill your side of the agreement, then the factoring company can ask for its advance back.
What all this means is that you need to choose a factoring company that offers you the most favorable terms. And of course, you need to know the details of the agreement, so you’re aware if there’s any chance that you’ll have to pay back the money if your retailer can’t fulfill his obligation.
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