Distributors are experiencing an increased demand from all industries. Being able to supply businesses ranging from the healthcare industry to the energy sector, retailers, and everyone in between is essential for success. Yet the increasing demand from customers means distributors are facing large and unexpected orders, and keeping a well-stocked inventory is a necessary part of the supply chain, and integral to economic growth.
Distributors and Staggered Payment Schedules
When distributors fill orders from clients, invoices are issued with staggered payment schedules ranging from 30 to 90 days. The staggered payment schedules reduce the rate of incoming revenue, which can place a severe strain on finances when distributors are facing an uptick in the size and volume of orders placed by customers. Some distributors resort to taking out short-term loans to bulk up their inventory. In extreme cases, distributors have to turn away potential sales because they do not have the materials and items available to complete large orders, which is frustrating to everyone involved, and pushes customers to purchase from larger competitors.
The Dangers of Loans and Cash Advances
Using short-term loans and cash advances to maintain or increase inventory can have undesired financial repercussions for distributors. Short-term loans place debt on the books. The brief and finite amount of capital can be used to replenish inventory, but once the capital is used, a distribution company has to repay the balance. If inventory runs low again, another loan can be used, which further impacts business credit ratings and only adds to the existing debt on the balance sheet. Short-term loans can quickly add up, especially if the revenue from sales is not coming in at a rate fast enough to pay off the loans and replenish stock. Similarly, cash advances can also place a major strain on cash flow. Cash advances are often advertised as an instant injection of debt-free capital that distributors can use to replenish inventory or even grow their operations. Cash advances have very high interest rates, and they are repaid from a small percentage of customer credit card transactions. This leaves distributors with large balloon payments when the terms of the agreement end. Cash advances also do not guarantee a faster rate of revenue and they withdraw the payments automatically from your bank account.
A Smarter Solution
Factoring allows distributors to get fast access to funds from sales without debt. When a sale is made, the distribution company submits the unpaid invoice for factoring. The invoice is then converted to capital which can be accessed the very same day. This gives distributors the funds necessary to maintain inventory and supplies to fill customer orders of all sizes. If you are in the distribution market and are looking for working capital solutions to maintain or even grow operations, contact the experts at New Century Financial today.