Supply Chain Finance Solutions that Improve Cash Flow
Cash flow is critical to every type of business, including U.S. distributors who make it possible for all kinds of manufacturers’ goods to get to retail stores, e-commerce retailers and other points of sale.
Similar to other businesses that wait for their customers to pay via accounts receivable invoices, distributors can also experience cash flow challenges that have the ability to derail their growth.
How to Employ Invoice Factoring as a Distributor Financing Tool
Distributors often extend payment terms to their own customers of 30, 60, 90 days (or even longer). However, these same distributors may be required to pay manufacturers up front for the products they purchase from their suppliers. In some cases, distributors may even be required to pay suppliers right away, rather than on terms.
This is the type of supply chain finance scenario that makes invoice factoring a viable distributor financing option!
The Invoice Factoring Process
Opportunity Cost Calculator
Factoring for Manufacturers
Receivables Financing as a Supply Chain Finance Tool
When invoice factoring companies factor (or purchase) invoices, they buy invoices at a discount. This puts working capital into the hands of the organization that factors (or sells) their invoices to DB Squared right away, instead of waiting for their customers to pay.
Distributors that factor invoices with DB Squared eliminate the weeks – or months – spent waiting for their customers to pay.
This type of distributor financing frees up the working capital that would otherwise be tied up as money represented by their accounts receivables invoices.
Distributors that factor invoices can reinvest more quickly in the inventory needed to attract more customers, in additional new product lines needed to expand their customer base or in large inventory purchases needed to satisfy orders of larger clients or receiving a bulk purchase discount.
Working capital freed up by invoice factoring can also be used to improve cash flow needed for operational expenses, equipment purchases and repairs, expansion and other capital expenditures.
In the following supply chain finance scenario, we demonstrate how invoice factoring can improve distributor cash flow using the fictitious organization, the Dynamic Distribution Company, as an example.
Supply Chain Finance Scenario: Distributor Financing through Invoice Factoring
The Dynamic Distribution Company decides to grow their customer base by adding product lines from a manufacturer that has strong consumer demand. The manufacturer requires all new distributors to carry their whole line of products and to commit to selling through a set number of introductory retail starter kits within 90 days of launch.
The Dynamic Distribution Company wants to take advantage of the manufacturer’s 8% discount on accounts paid upon receipt of delivery rather than 90 day terms.
Not wanting to interrupt their normal cash flow needed to meet operational expenses, they explore supply chain finance options and decide to take advantage of our distributor financing tool by factoring invoices with DB Squared in order to free up working capital needed to take advantage of the manufacturer’s discount.
So they factor (or sell) their accounts receivable invoices to DB Squared at a discount. Within 1 business day, for each invoice factored, DB Squared forwards up to 98% of the face value amount, retaining the remaining 2% (less factoring fee, which is usually from 1-6%) as a “reserve.”
As each of the purchased invoices are paid in full, DB Squared also releases the reserve amounts back to the distributor.
Contact us to request more information about distributor financing options.