A fundamental part of any successful business plan is determining how and where you plan to acquire the necessary financing to operate and grow. Whether through a traditional bank or an alternative lender, consumer products companies have several viable options to tap into. Whether you’re looking to cover operating or material costs, improve cash flow, or even fund an expansion, it’s important to identify the option that’s right for your business.
Apart from traditional business financing, many consumer product companies choose invoice factoring. This is the practice of selling your accounts receivable invoices to an outside vendor.
Benefits of Invoice Factoring
Invoice factoring is a popular option for consumer product companies because it provides immediate cash flow for short-term financing needs, instead of waiting 30, 60, or even 90 days for an invoice. be paid. When companies sell their invoices for factoring, they typically receive a percentage of the invoice value as an advance, with the remaining balance, less factoring fees, being returned to the company once the invoice is paid. .
Since invoice factoring leverages already outstanding receivables, it does not require additional collateral and likely involves a shorter approval process than traditional bank financing. Additionally, most factoring agreements provide for customer credit checks, relieving the company of the time and expense associated with this important function.
Invoice factoring can become the cornerstone of a company’s financing strategy, as the line of financing can easily increase as invoice balances increase, making invoice factoring a potentially attractive option. for businesses that need their financing to keep pace with their growth. Factoring can be especially appealing to businesses with quality customers who need immediate cash flow and are willing to pay the associated fees.
Disadvantages of Invoice Factoring
While the concept of leveraging cash already in circulation might seem like a no-brainer, invoice factoring won’t be the best fit for every consumer products company.
Cost is the biggest barrier to invoice factoring. Invoice factoring is generally more expensive than traditional financing provided by banks. Factoring fees can be up to 5% of the invoice value for each month the invoice is unpaid.
The type of invoice factoring arrangement will also impact the attractiveness of this option. These agreements are usually structured as recourse factoring, non-recourse factoring, or a combination of both.
In non-recourse agreements, the factor bears the risk of collection. Under these agreements, factors will assess the creditworthiness and collection history of your customers to determine whether they will purchase the invoices. If a customer has higher credit risk or is a slow payer, the factor may determine that the risk is too high to purchase the invoices under a non-recourse agreement.
With recourse agreements, a business will be required to redeem any invoices that are not paid, leaving the risk and burden of collections on the business.
Finally, when selling your invoices to a factor, the factoring company will be in contact with your customers to inform them of the arrangement and any late payments. Some customers may not want their financial information shared with a third party that they have not verified themselves.
In the consumer goods sector, whether it is for operating expenses, inventory or production, companies will continue to explore different options to finance their growth and operating costs. If you’re hesitating between invoice factoring or acquiring a business loan for these purposes, think about your options and what’s best for your particular situation.