WHAT'S IN THIS GUIDE
If you’re a business owner or entrepreneur looking for a flexible financing solution to improve cash flow, streamline operations, and boost growth, wholesale invoice factoring could be a solution. But with so many funding options out there, how do you know if wholesaler factoring is right for your business? This guide offers a comprehensive overview of everything you need to know about invoice factoring for wholesalers to help you decide if it’s right for you, as well as tips for choosing the right factoring company for your specific needs.
Many wholesale companies offer net terms to their customers, meaning you’re stuck waiting 30, 60, or even 90 days or more for payment from retailers. While net terms can provide flexibility and convenience for buyers, waiting to get paid on outstanding invoices is challenging for suppliers. As entrepreneurs ourselves, we understand how stressful this can be!
Because retailers often pay months after orders are delivered, your business can end up without adequate cash flow. This makes it difficult to cover everyday business expenses like payroll and marketing. It also makes it tricky to purchase more products to supply both new and repeat customers.
Wholesale invoice factoring is a financing method that allows businesses operating in the wholesale distribution industry to convert their unpaid invoices into immediate cash. It is a form of accounts receivable financing or distributor invoice finance where a company sells its invoices to a factoring company at a discounted rate in exchange for immediate payment.
If you’re a growing business, oftentimes you need working capital quickly to fund big projects. And unless you have excellent credit history with more than a couple of years in business, it will be difficult to qualify for traditional financing options through a bank. Wholesale invoice factoring can be a practical option in this case.
The process of wholesale company invoice factoring is slightly different for each wholesale factoring company, but here’s how wholesale invoice factoring typically works:
Invoice Generation: You deliver goods to your customers and generate invoices for the amounts owed.
Invoice Submission: You then submit the unpaid invoices to a distributor factoring company, also known as a factor.
Verification and Approval: The factor verifies the invoices and assesses the creditworthiness of your customers. This step helps determine the level of risk associated with purchasing the invoices.
Funding: Upon approval, the factor advances a percentage of the invoice value to your business in days. (FundThrough has 100% advance rates, less a fee. AR factoring wholesalers fees typically include what’s known as a discount rate or factoring fee, which is a percentage of the total invoice value.). This payment in advance of the original net terms provides you with a quick cash injection, allowing you to meet your financial obligations or invest in your business during a growth phase.
Collection and Payment: The distribution factoring company takes responsibility for collecting the invoice payment from your customers. (See how we work with your customers if this concerns you.) Once your customer pays the full invoice balance, there’s no more obligation.
Any situation where you find yourself in need of working capital quickly and easily could be a use case for factoring for distribution companies, but these are the ones we see most often based on our experience with our clients:
Factoring for distributors offers several benefits.
When it comes to choosing a wholesale factoring partner, it’s important to do your homework. We’ve made it easy for you to know the right questions to ask as you vet a partner to find out if they’re a fit.
By considering the answers to the questions below, you’ll be in a good position to make an informed decision and choose a partner that best suits your business requirements, so you can optimize cash flow and drive growth.
Most factoring companies work with most industries, but not all. Some factors specialize in only a few industries. When you work with a factoring company that has experience in the wholesale industry, they already understand the nuances of the industry which makes it easier to work together.
FundThrough works with wholesale providers.
The advance rate is the percentage of the invoice value the factor will advance your business. Advance rates can range from 60% to 100%, depending on the factoring company and sometimes the industry. Always inquire about the advance rates a distribution factoring company offers, as higher advance rates provide more immediate working capital for your business.
FundThrough advances 100% of the invoice amount, less a fee.
A minimum is the amount you must factor every period (month, quarter, or year) or a requirement that you must factor every invoice for a particular customer. Some factoring companies offer plans that require minimums, while others do not.
FundThrough doesn’t require minimums. Only fund when you need to.
Invoice factoring companies typically have a few qualifications you’ll need to meet before they can start funding your invoices. In most cases, your business will need to meet the following conditions before applying:
See if you’re qualified for FundThrough in minutes.
Wholesale invoice finance is often used as another term for wholesale invoice factoring, but it’s actually slightly different. With wholesale invoice financing, a financing company advances payment for your invoice ahead of net terms. You then repay the finance company for the loan, plus any fees over a set period of time. There is no customer contact, and you work with them to settle payment according to the original invoice terms.
With wholesale invoice factoring, a factoring company advances payment for your invoice ahead of net terms, minus any fees. The factoring company works with your customer to redirect payment, and manages the collections process on your behalf. Once the invoice is paid according to the original invoice terms, there’s no further obligation.
Along with revenue-based and equipment financing loans, there are four other common types of loan options for small businesses.
When a business needs capital to grow, a lender provides a lump sum of money at a fixed interest rate to be repaid over a set length of time called repayment terms. Business loans are usually for higher amounts than personal loans.
A business line of credit can be secured or unsecured. It works a lot like a credit card. Your business draws money as needed, and only pays interest on the amount borrowed. Once paid off, you can borrow against the line of credit again.
Working capital loans are short-term loans to be used to cover things like rent, payroll, and cover immediate expenses. Working capital loans should not be used as long-term options as interest rates can be higher than with other funding options.
For wholesale businesses that may not qualify for a term loan, an SBA loan or a loan through the Canada Small Business Financing Program might be a good option as a portion of the loan amount is guaranteed by the organization or program rather than a bank or other financial institution.
In the past, factoring was largely misunderstood. Business bank loans and lines of credit were the traditional and accepted forms of financing, along with credit cards. Each of these different funding options have pros and cons to consider.
Costs for a new or growing business can be significant. You may need to purchase equipment and inventory, pay employees, and keep up with rent, taxes, and marketing. You may consider taking out a business loan.
A line of credit (LOC) is a lot like a credit card. You can withdraw money up to a certain maximum amount determined by your financial institution. You can cover day-to-day expenses and pay back your debt, only to borrow again when needed.
Like many forms of funding, the flexibility of credit cards is easy to use, making them easy to use too much.
Invoice factoring is not a loan. The application process is quick, there is no repayment obligation, no high interest rates, and no debt to record on your wholesale company’s balance sheet. Plus, many more companies will qualify.
FundThrough pays invoices in days for industries outside of this list as well.
Interested in possibly embedding FundThrough in your platform? Let’s connect!