The strategy to increase working capital by small businesses is supply chain factoring and factoring. Also known as accounts receivable finance, Factoring is the solution to get a cash flow back into business by using the buyers’ invoices. These methods remove the incoming cash flow blockage.
Difference between supply chain financing and factoring?
A supplier-driven approach, factoring enables a supplier to sell its invoices to a factoring agent in return for partial payment. Suppliers initiate the arrangement without the buyer’s involvement. Once the buyer pays invoices, the supplier repays the factoring agent.
The most significant advantage of this is that you have control over your invoices. The above approach is factoring.
A buyer-driven approach is supply chain factoring. A buyer applies for this in which suppliers are involved. A supplier can sell its invoices to a funder for early payments. The supplier receives the full amount of the invoices, and only a small processing fee is there. The most significant disadvantage over here is the loss of control.
Benefits of factoring
Fast access to capital
Every day, you come across many lucrative business opportunities; to miss them due to lack of funds causes frustration. Traditional methods of financing require a lot of time and formalities to be fulfilled. Sometimes due to market conditions and other factors, banks turn down loan applications. The easy way to boost cash flow conditions is factoring.
Factoring helps in the growth of credit profile.
For building a more robust credit profile, this is an effective solution. It helps develop new and young companies in a positive light in the credit history of the accounts.
Easy to qualify
The collateral is your current invoices for obtaining cash flow; hence it is quicker and more straightforward than traditional methods. Usually, within a day, approval is received.
Companies can beat the downturn.
In tough economic times, the financial companies are more concerned about your buyers’ creditworthiness than you. So, if the buyers have a better credit history, it boosts your approval. Every business sees terrible and challenging times, so the easiest way to obtain immediate working capital is factoring.
Costs of factoring
The cost of factoring depends on three factors-
- Rate – The fee rates range from 0.5% to 5% of the invoice amount per month. The determination factor of fee rate is the customers’ quality, the number of customers, your industry’s nature, and your business financials. The more number invoices generated will help lower the fees.
- The service length-The period for which net terms stand is a consideration for the cost factor. The shorter period you take for financing lesser is the fees charged on a weekly or monthly basis.
- Additional fees- Always check-in between lines, If a lower cost is, there are chances of some extra charges. The best way is to study the agreement closely.
How to start with factoring?
There are four simple ways to apply for factoring, unlike traditional financing methodologies.
- An online application is filled, which contains details like the nature of business and customers.
- The company will review your application and reply within day.
- Submit an invoice to the companies website
- Get the money according to the terms.
Benefits of supply chain factoring
We have two aspects to look for:
Advantages to the buyer
- Buyer- supplier relationships- A more powerful bond builds as faster payments are existent.
- Stability- Suppliers have the opportunity to receive prompt payments so that they can make a healthy base and provide consistent service to the buyer.
- Costs-The suppliers charged for early payment of invoices.
- Increased liquidity-Buyer can extend the payment terms without adversely affecting the financial stability of the supplier.
Advantages to the supplier
- Improved efficiency- Quick access to the receivables as soon as the goods/ services are approved. Within 24 hours, suppliers receive the payment.
- Cash flow control-Suppliers are in control of their cash flow, which helps in future growth and forecasting.
- Credit rating-The credit rating gets a boost and a better platform. The finance facility depends on the strength of the buyer’s business.
- Flexibility-Faster payments are required only drawn as and when needed to suit individual cash flow requirements.
Working capital is the backbone of any business. If you are a large supplier with an investment-grade credit rating, then the cash flow would not be a problem for you until the market is facing challenging times. Although if you are a small supplier with no credentials for your credit history, then supply chain financing and factoring lend a big hand in getting a continuous cash flow and improving your credit rating.