How to Use Factoring to Finance Your Food Distribution Company

While profitable, owning a food distribution business is often challenging and demanding. The product logistics are often complicated since you need to simultaneously:

  • Buy and receive products from suppliers
  • Deliver products to clients
  • Manage the financial tug-of-war between suppliers, who demand quick payments, and clients, who insist on paying invoices on net-30 to net-60 day terms

For this reason, most successful food distributors describe their businesses as “controlled chaos.”

Cash flow is challenging

The problem with controlled chaos is that when it gets out of control, it can create major financial problems. Small food distributors without large financial reserves are susceptible to these issues. If left unchecked, these problems can ripple through the whole company, affecting your ability to meet supplier payment deadlines or other critical expenses.

Of course, missing supplier deadlines causes suppliers to tighten their credit terms and demand even faster payments from your company. These problems can become a vicious cycle. The best way to deal with them is to make sure they never happen. If they do happen, you need to stop them quickly before they grow.

Let’s define the problem

The problem is simple. Your cash flow cycle is very long because clients pay slowly but expenses happen quickly. Quick expenses and slow revenues are seldom a good combination.

Solving the problem

Basically, food distribution companies can solve this problem in two ways. The first way is to ask clients for faster payments. You may convince clients to pay quickly if you entice them with a discount. Offering a 2% discount in exchange for a quick payment is common in the industry. This strategy can work well if your clients cooperate and have available funds. The main problem is that your working capital is still in the hands of your clients. And your clients could resume paying slowly at any time.

A better way to solve this problem is to use business financing. Invoice factoring, a tool designed to solve this specific problem, works by partnering your company with a funding company that acts as a financial intermediary between your company and your client. When you invoice your client, the finance company pays you, using the invoice as collateral. The transaction concludes once the customer pays in full. The customer is not required to pay any sooner. Here is a more detailed explanation about factoring.

Advantages for food distributors

Factoring invoices has a number of advantages. The most important advantage is that you can offer terms with confidence because you will always be able to factor an invoice if you need funds. This benefit has important implications for your company, especially if working capital problems were holding back your sales. Factoring can truly propel your growth.

Another advantage of invoice factoring is that it’s fairly easy to qualify for. Since the funding company is financing your invoices, having creditworthy customers is a must. Additionally, your invoices can’t be encumbered by liens or legal problems. If you meet these criteria, qualifying is relatively easy.

One last advantage of working with a factoring company is that they help review the creditworthiness of your invoices and can make suggestions to improve your billing practices. When done correctly, this approach can lead to fewer bad-debt write-offs.

Because of these advantages, factoring financing can be a great solution for food distribution wholesalers whose working capital problems are preventing them from realizing their potential.

Get more information

We can provide you with high advances at a low factoring rate. For information, get an online quote or call (877) 300 3258.