Like most distribution companies and resellers, industrial product supply companies are often managed with very tight cash flows because of lower profit margins in a competitive environment, short vendor payment cycles, and extended client credit terms.
Clients demand credit terms
Industrial sales are often done on credit terms, allowing clients to pay an invoice after the product has been received. In the past, sales were made on net 30-day payment terms. However, a recent trend has shown an increase in terms from 45 days to as long as 90 days.
To handle these delayed revenues, industrial suppliers need to build reserve accounts to cover day-to-day expenses. However, many have been unable to build an adequate reserve and have faced serious cash flow problems.
Short vendor payment cycles
Vendors, on the other hand, have tightened their payment cycles and are demanding faster payments. This demand often affects small industrial distributors who have not built credit with suppliers. Payment is usually required within 10 days of product delivery. In some instances, vendors require prepayment of goods.
The net result? Cash flow problems
Long client invoice payments cycles coupled with vendors demanding quick payments often results in financial problems. At the very least, the industrial supplier won’t be able to grow, simply because they have no money to follow new opportunities. At worst, the company can run into serious financial problems and be unable to pay vendors, meet payroll, or cover basic operating expenses.
Is conventional financing the solution?
You can solve most of these problems with a line of credit that provides the flexibility to pay vendors and cover business expenses while waiting for customers to pay. Getting a line of credit, however, is difficult. Most banks only finance large companies with rock-solid assets and a long track record of sales growth. Not many small or medium-sized industrial distributors can meet these requirements.
However, two alternatives can solve this financial problem: purchase order financing and receivables factoring.
Use purchase order financing to pay vendors
If you have a number of large purchase orders but don’t have the funds to pay suppliers, consider using purchase order financing. This tool helps you cover vendor expenses for confirmed purchase orders from creditworthy suppliers. The purchase order financing company pays vendors on your behalf, enabling them to ship the product and fulfill the order.
The transaction concludes by financing the receivable that ensues from the sale or by waiting for your customer to pay on their usual terms.
Use receivables factoring to run your business
On the other hand, if slow client payments are creating financial problems and you need funds to run your business, consider factoring. This solution provides you with an advance on your slow-paying receivables from creditworthy customers. Receivables financing reduces your effective DSO (day sales outstanding) to just a couple of days, without requiring clients to pay sooner.
The transaction works by partnering with a factoring company who finances your invoices and holds them as collateral. The transaction concludes once your clients pay in full, on their usual schedule.
Reduce transaction costs
It’s common to combine receivables factoring with purchase order funding as a way to reduce total costs. Costs are reduced because factoring costs less than purchase order funding. Transactions start as a purchase order finance and then are refinanced as a receivables factoring transaction when you send an invoice to your client.
There are two important advantages of using receivables factoring and purchase order financing. First, your industrial supply company improves its cash flow and minimizes the effects of slow-paying clients. But, more importantly, you can take orders that exceed your current level of financing, enabling you to grow your company.
And compared to most bank financing solutions, both products are relatively easy to get.
Does your industrial supply company qualify?
In general, your industrial supplies company should qualify for receivables factoring if:
- Your industrial clients have good credit
- You have good billing practices
- Your invoices are not encumbered by liens
However, one of the disadvantages of purchase order financing is that it can only help companies that resell finished goods at high profit margins. Because of this limitation, to qualify for purchase order financing, your company must also:
- Buy finished goods from third-party suppliers
- Have gross margins above 20%
Using these two financial tools can be ideal for growing industrial supply companies that have growing orders but are being held back by cash flow problems from slow-paying clients.
Get more information
We can provide PO financing at competitive rates to supply distribution companies. For information, get an online quote or call (877) 300 3258.