May 18, 2024

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The Benefits of Invoice Factoring for Wholesale Companies

What is invoice factoring? Most essentially, it should be thought of as a common service that is there to answer cash flow issues in the short to medium term. Salt Lake City’s FastFACTR, an invoice factoring service, describes their services pretty succinctly as a means for companies to receive the revenue from created invoices before the actual payment date. All that is required is the invoice itself. The factoring service then pays it, and the amount is repaid when the invoice itself paid. This is useful for cash flow issues which arise because the revenue for a company’s financial obligations simply hasn’t come in yet. 

So far, so good. But things tend to get a little more complicated when we ask the question, “Who should actually use invoice factoring?” Certainly, it should not be used as a remedy for chronic cash flow issues being caused by something else. And it certainly shouldn’t be used as a means of acquiring revenue with no means to pay it back. 

However, there is another misconception about when invoice factoring is useful. This is that invoice factoring is not for wholesale companies which typically make their money from large bulk sales to retailers. In fact, invoice factoring makes sense as a temporary remedy for cash flow issues with wholesale companies as well.

The Difference with Wholesalers

Naturally enough, the difference between wholesalers and retailers, where invoice factoring is concerned, goes back to the different business models practiced. Wholesale companies typically work with lower gross margins than retailers, and so there is certainly an imperative to turn around inventory fast to ensure that a healthy cash flow is maintained. In this sense, wholesale companies might even be considered more suited to invoice factoring. 

For wholesale companies, the working capital cycle is of paramount importance. The working capital cycle refers to the time it takes to turn assets into cash – from the purchase (or manufacture) of wholesale produce until its sale (the payment of the invoice). Invoice factoring can play a massive role in slashing the working capital cycle, providing revenue almost immediately, for only a small fee. Certainly, it works out a lot cheaper than taking out almost any other kind of business loan. 

Benefits of Invoice Factoring for Wholesalers

Here follows some further benefits of invoice factoring for wholesalers. Besides slashing the all-important working capital cycle, invoice factoring can also do all of this for wholesalers:

Replenish Inventory Faster

Pretty much a golden rule for wholesalers is to replenish inventory as fast and as often as possible. If an invoice is not paid early enough, then the replenishment of the stock just purchased can be delayed, meaning it cannot be purchased again for a while. It is easy to see how this is a major block to wholesale success. 

Better Deals with Vendors

For wholesalers, this usually means the manufactures who supply the actual produce. And with wholesalers, this is normally something of a negotiation. With the promise of rapid payment and no delays, better deals can be struck simply because delayed payments adversely affect a company’s reputation. 

Increase Available Working Capital 

Available working capital means revenue that has not been extracted for profit, but which also does not have a set use from the get-go (i.e., it is not immediately going on some regular payment). Having this capital to hand allows for expansion and improvements made. Invoice factoring can increase this available capital all through the month. 

Invoice factoring makes a whole load of sense for wholesalers – it is actually surprising that it isn’t normally associated with them.