Inventory Factoring for Internet Retailers
Depending on the size of your internet retail company you may or may not have access to large amounts of capital. Surprisingly even some large retailers deal with occassional cash flow issues.
In general solving cash flow problems isn’t too hard - most retailers will lighten up on inventory and push their customers to drop-shipped products. If you can negotiate net 30 terms with your drop-ship suppliers and the majority of the orders you process use credit cards then you have approximately a 25 day float - you just need to ensure that your drop ship margins (which are typically much lower than stocked margins) can support your day-to-day expenses.
If you sell products to large corporations or the government, however, a cash flow crisis may mean turning down a lucrative order. If you are sourcing products internationally (read: China) terms probably are not an option. Most large corporations or government entities, however, will demand terms. Suddenly you find yourself on the bad side of the float.
Enter inventory factoring - a popular finance tool offered by most banks. Basically they will look at your accounts receivable (in this case the purchase order from your large customer) and cover the material cost for the order for 30-60 days. The financial cost is quite high (typically about 1.5%/month or 18% APR compounded monthly), but it could mean the difference between closing the sale and having to turn down a large order. Also, when you prove that you are capable of filling these large orders you are much more likely to be a supplier of choice to these coveted customers.
By offering your customer net 30 (typically the minimum they will demand) and securing a 60 day term on the factoring, you are incurring an additional expense of 3% in order to fill the order without tying up any of your existing capital. Work with your manufacturer on getting the lead-time down to within a few weeks and your customer should receive their shipment (by boat) within 30 days guaranteeing that you will never have to tie up existing capital filling the order.
As far as the 3% finance fee goes - get into the habit of building it in to your quote and charge a 2% late fee. This will cover an additional month of financing in the even that the customer is slow on payment.
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structured settlement…
Factoring, also known as accounts receivable factoring, is a business term used to describe a method in which companies sell their outstanding receivable invoices in order to gain immediate cash for their business. When a company sells a product or ser…
Trackback by structured settlement — July 9, 2009 @ 11:04 pm