Most fast-growing food service industry companies that work with corporate accounts are used to the fact that clients demand net 30 to net 60 day payment terms. While this business practice is common in Canada, it also poses a serious challenge to small and growing food service companies that can’t afford to wait that long to get paid. Unless this situation is properly managed, it can lead to working capital problems that eventually spiral out of control.
Solving the cash flow problem
One way to improve your cash flow is to consider factoring invoices. Invoice factoring solves this problem by providing an advance on your slow-paying invoices from creditworthy commercial customers. This solution gives your food service company the working capital it needs to meet critical business expenses – such as staff and food suppliers – and relieves the pressure of dealing with slow-paying customers.
How does invoice factoring work?
The transaction is structured using a financial intermediary called a factoring financing company. The factor advances the funds to your company while holding your accounts receivable (invoices) as collateral. The factor also settles the transaction once your customer pays in full on their usual schedule.
Transactions are often funded in two instalments: the advance and the rebate. The advance usually covers about 85% of the gross value of the invoice and is deposited to your account as soon as you deliver the food services and invoice your client. The remaining 15%, less the funding fee, is rebated to your account as soon as your client pays the invoice.
Invoice factoring works well with small businesses and has many benefits and few disadvantages. The main benefit is that it accelerates your revenues and improves your cash flow fairly quickly. Additionally, your line is flexible and can increase as your food service company grows. These benefits make invoice factoring an ideal solution for growing food service providers with cash flow issues.
However, the solution does have some disadvantages. Due to its cost, invoice factoring only works with companies that have high gross margins (15% or more). Also, factoring requires customer collaboration. However, for many companies, the benefits and flexibility of invoice factoring far outweigh any disadvantages.
Will you qualify?
Qualifying for factoring is easier than qualifying for other business financing products. The most important requirement is that your customers have good commercial credit. This requirement is critical because the whole transaction is based on your customer’s ability to pay the invoices. Aside from that, your company must also meet these requirements:
- Your invoices must be for completed services
- Your invoices must be free of encumbrances
- Your company must not have legal or tax problems
- You must have experience in the food service industry