Most automotive supply companies operate on relatively thin margins and tight cash flows. In this competitive industry, suppliers give every incentive possible to win their client’s business. One of those incentives, offering payment terms, often causes financial problems.
Most auto manufacturing companies and their supply chain providers demand payment terms as a condition of doing business. This condition allows them to pay invoices in 30, 60, or 90 days. These terms often roll down the automotive supply chain and affect everyone, so there is little that you can do about it. If you don’t offer terms, your client moves to a competitor who does.
What are your alternatives?
If your company has cash flow problems because it offers payment terms, consider building a larger cash reserve. This solution is effective but difficult to accomplish in the automotive supply environment of slow payments and tight margins. A better alternative may be to offer clients a discount in exchange for faster payment. Clients may be open to this offer since it improves their profit margins. They get better profit margins and you get better working capital.
A more reliable alternative is to use a line of credit (or similar product) to finance your operations while waiting for payments. While this solution is more effective, it creates a different problem: qualifying for a line of credit is very difficult. Most lending institutions have rigid collateral standards and profitability requirements.
A better approach: accounts receivable financing
You have a cash flow problem because clients are paying on net terms, but you can’t afford to wait. If they paid sooner, you would not have a problem. Obviously, getting automotive industry clients to pay sooner is difficult. However, you get many of the benefits of quick payments by financing your accounts receivable.
This solution improves your cash flow by reducing the time it takes to receive payments. And your customers do not need to pay sooner. Instead, a receivables factoring company finances your invoices from creditworthy clients, giving your company immediate access to funds to pay vendors, payroll, and other operational expenses. Financing receivables improves your cash flow, enabling you to minimize the problems associated with slow payments.
How does it work?
This type of financing integrates easily to most automotive supply companies and uses a simple transaction. The finance company purchases your accounts receivable in two installments. The first installment covers 80% of the receivable and is paid as soon as the work or product is delivered to your client. The remaining 20% is rebated as a second installment once your client pays the invoice in full.
The fee for this service, usually a small percentage of the invoice, is determined by the dollar amount and credit quality of your receivables. For more information, please read “What is accounts receivable factoring?”
Smooth cash flow and growth financing
The main advantage of receivables financing is that your cash flow improves – often dramatically. You no longer need to worry about slow-paying invoices. More importantly, the line is designed to support growing companies and can increase with your sales. If you have had to decline sales because you could not offer payment terms, this solution is a game-changer and helps you grow.
To qualify for receivables financing, you need high-quality invoices. In other words, your clients must have good commercial credit and your receivables must be free of encumbrances. Most well-managed automotive suppliers meet this criteria. Receivables financing can be an ideal solution for automotive suppliers with cash flow problems because of slow-paying commercial or industrial clients.
Get more information
We are a leading factoring provider and work with automotive supply companies. For more information, please get an online quote or call (877) 300 3258.