Factoring Financing for Chemical Supply Companies

For many growing chemical supply companies, cash flow can be a problem. Most managers are often caught in a tug-of-war between revenues and expenses. Managing the finances of your chemical supply company can be demanding, especially when companies have low profit margins and run very lean operations.

Money flows out quickly

Unless your company has a long track record, most vendors ask that you pay invoices within 10 days. And if your company is small or new, vendors may demand prepayment before shipping goods to your company. Getting credit from vendors can be useful, but acquiring credit can take time.

Other expenses, such as payroll, rent, and equipment are also paid periodically (usually every 30 days or less) and affect your cash reserves and your ability to operate.

But money flows in slowly

On the other hand, if you sell chemical products to large industrial or commercial clients, you have to offer sales terms. In the past, “sales terms” meant that your invoices were paid in 30 days. However, the industry has changed, and current terms often extend from 45 to 75 days.

Waiting up to two months to get paid can be challenging, if not impossible, for a small business – especially for chemical supply companies with significant upfront expenses.

You can be profitable and have financial problems

Many companies with these financial problems are profitable – at least on paper. The reality, however, is that they have poor cash flows and often find themselves in financial difficulty – delaying vendor payments or juggling other payments. If you handle the problems incorrectly, you could overextend your company and risk going out of business.

Using business financing

You can solve this problem by using business financing to help cover operating and supplier expenses until clients pay. The business financing you get should be determined by the type of problem that your company has. Most chemical supply companies have one or both of these problems:

  • They need funds to pay suppliers
  • They need funds to cover ongoing corporate expenses

The following solutions – purchase order financing, supplier financing, and invoice financing – help with these problems.

PO financing

If your company resells chemicals but you don’t have enough funds to pay your vendors, use purchase order financing, a solution that covers the direct cost of goods sold (COGS) expenses for confirmed purchase orders. Essentially, the finance company pays vendors on your behalf, enabling them to deliver the goods and allowing you to fulfill the order.

Purchase order financing can work well if your company has large orders that exceed its current levels of capital or financing. Another benefit of purchase order financing is that the line is available to small companies that don’t have a long track record.

Keep in mind that purchase order financing can finance only the costs associated with a specific order. Additionally, it cannot be used if you want to build inventory or if you manufacture products directly.

Supplier financing

Unlike PO financing, this form of supply chain financing can be used by both manufacturing companies and product distributors. It can be used to build inventory, fulfill an order, or both.

It works by having the finance company intermediate the purchase of your raw materials or finished goods. The finance company buys the goods from your suppliers and resells them to you, at a markup, on credit terms. You pay for the goods once the invoice matures.

An important advantage of supplier financing is that it is compatible with most financial products that you may already have (e.g., line of credit or business loan). It is a great solution for small and midsize manufacturing companies that need to extend their financial capabilities in order to grow the business.

Invoice financing

Waiting up to two months to get an invoice paid can create serious financial problems, especially if expenses are piling up. You can solve this problem by factoring your invoices. Invoice financing provides immediate financing for your slow-paying accounts receivable from creditworthy industrial and commercial clients, alleviates the working capital shortages created by offering credit terms to clients, and provides funds to cover corporate expenses.

Combining factoring and PO financing yields lower costs

One advantage of factoring and PO funding is that they can be used together, which often lowers the total transaction cost because factoring invoices is often cheaper than purchase order funding due to its lower risk. In essence, by factoring the invoice, you refinance a transaction that started as a purchase order finance transaction.

Easier to get than conventional financing

These financing solutions are easier to get than conventional bank financing.

To qualify for invoice financing, your company:

  1. Must have clients with good commercial credit
  2. Must not have encumbered accounts receivable
  3. Must not have serious legal/tax issues

To qualify for purchase order financing, your company must:

  1. Meet all the requirements of factoring
  2. Resell unmodified products
  3. Have profit margins greater than 20%

Lastly, to qualify for supplier financing, your company must have:

  1. Minimum annual revenues of $2,000,000
  2. At least three years of operational experience
  3. The ability to be credit insured

These solutions create a powerful financial combination for companies that have great opportunities but are being held back by cash flow problems resulting from slow-paying customers.

Get more information

We can provide factoring, PO funding, and supplier financing at competitive rates to chemical supply distribution companies. For information, get an online quote or call (877) 300 3258.