Wholesalers and importers are in the business of making goods, often in bulk, available to other companies or individuals so that they can sell them at the retail level. Having the capital to provide these goods is absolutely essential.
If a company is not able to raise the funds needed for materials and also the manpower to create those goods, a wholesaler (or importer) will have to turn down those jobs. If they are continually unable to get the money needed, they will eventually be forced out of business.
Because a wholesaler or importer may not be paid until after their wares are delivered they carry both the burden and the risk of financing whatever products they are selling. This may result in a cash crunch, with them unable to meet their immediate and future obligations. One very good option that an increasing number of companies are beginning to consider, is purchase order financing.
Purchase order financing is a way for a wholesaler or importer to get money upfront. Instead of waiting to be paid until after they have delivered the goods, they are able to obtain capital even before they ship those goods out. This gives them the cash they need for personnel, materials and whatever bills they have.
A company using purchase order financing will sell their purchase orders to a factoring company. The factor will purchse them at a discounted rate, often at around 80% to 95% of their full value. For example, if a wholesaler had an $100,000 invoice, they might sell it for a factor for $90,000 or 90% of the total invoice.
This money would be paid to the company upfront and could be used for whatever purposes they deem necessary. The factor would them collect what is owed on the invoice. After they have done so they will return the remaining monies to the company they purchased the invoice from, minus find a prearranged fee.
When working with a factor, the most important consideration is the credit history of the invoice holder. If their credit is bad, the chances are low that the factor be able to collect on the invoice and thus be repaid.
Factoring (also known as invoice factoring, invoice financing, or invoice funding) is not dependent on the credit history of the wholesaler or importer, but on the company’s customers. This might be great news for many companies, especially those either are new to the business and subsequently don’t have much of a credit history and also for those who have a low credit score.
Factoring allows them to raise capital regardless of their credit history and without debt. Taking on debt can be risky. Whatever monies a company borrows, they have to repay. If a business takes on too much debt, they may have trouble paying it back, putting the company at risk.