As a retail food broker, you’re probably familiar with the fact that large supermarket customers, like Costco and Loblaws, often demand payment terms when buying retail items from suppliers. As a vendor to large retailers, you have little choice. You have to offer the payment terms that they demand if you wish to keep their business.
As a result, your revenues are often delayed by four to eight weeks. Unfortunately, that is not your only problem.
The supplier side is challenging as well
If you can get term credit from your own suppliers to match those of your client, then your company should be able to retain a solid financial position. But if your suppliers don’t offer terms, or if you don’t qualify for them, you need to prepay for goods. This scenario means that your expenses are immediate but your revenues are delayed.
Unless your company has substantial cash reserves, immediate expenses and delayed revenues can cause serious financial problems if your company is growing quickly or if you are getting larger orders. And, if not managed correctly, these problems could leave you without funds to pay operating expenses.
Asking for faster payments
A common way to fix this situation is to ask your larger customers for faster payments. This arrangement is usually possible if you offer something in return – such as a 2% discount if they pay in ten days or less.
However, not every customer will agree to pay faster. And those that do agree can always keep the option of changing their payment speed if their circumstances change. So, while your situation may improve, you still end up with unpredictable cash flow.
Finance your invoices – improve cash flow
One simple way to solve this problem is to factor your invoices. Factoring provides you with immediate funding while using your invoices from creditworthy customers as collateral for the transaction. In addition, factoring improves your cash flow. Because you can get immediate funds from the finance company, you no longer have to wait up to 60 days for payment.
When used correctly, this solution can provide the financial support you need to grow your company and take on new clients.
How it works
Most invoices are financed using two instalments – the advance and the rebate. The advance usually covers 80% of the gross value of your invoice and is provided once the food products have been delivered to your client and the invoice has been verified.
The remaining 20% is rebated to your company as soon as your client pays the invoice on their regular schedule. The fee for the service is often discounted from this instalment. For more information, please read “What is factoring?”
Is factoring right for you?
Determining whether this solution is right for your company is fairly simple. Factoring can help your company if the following three statements are true:
- Your company has cash flow problems
- The problems are caused by slow-paying commercial clients
- You need the funds to cover operational expenses
Need additional funds to pay your suppliers?
It is not unusual for retail food brokers that are growing too quickly to simply run out of money, leaving them unable to pay suppliers. If you have this problem, there are two possibilities.
One alternative is to consider using purchase order funding. As its name implies, purchase order funding can be used to cover supplier expenses associated with large orders. This solution works well with companies that don’t need to keep inventory stocked in a warehouse
Another alternative that can help larger brokers is an inventory financing line. This solution works well with companies that must keep product stocked at all times. It allows them to leverage their existing inventory and use the proceeds to buy additional product – or pay any business expenses.
Do you qualify?
Receivables factoring is easier to get than other financing solutions and is usually available to small companies. To qualify, your retail food brokerage should meet the following criteria:
- Work with creditworthy food retailers or commercial clients
- Have good profit margins
- Have unencumbered receivables
- Be free of major legal/tax issues
Since it’s easy to obtain, factoring can be ideal for retail food brokers that have opportunities but are constrained by cash flow problems due to slow-paying clients.