How Inventory Factoring Can Benefit Your Business

Cash flow is an essential aspect of any successful business. Though maintaining cash flow requires work and consistent management, positive cash flow allows business owners to regulate operations as well as expand upon areas of their business.

To learn more about cash flow and cash flow management methods, click here.

While there are many methods for managing cash flow, this article focuses on how factoring can increase a company’s positive cash flow. In addition to this, we spoke to Jakub Ananicz, CEO and founder of Faktorama, about how reverse inventory factoring in particular can benefit business owners.

What is Factoring?

According to Faktorama, factoring is a corporate finance technique that enables a business to do at least one of two things with their accounts receivables. Accounts receivables represent money owed to the business from its customers for sales made on credit:

• Transfer the credit risk of accounts receivable to a third party.
• Leverage accounts receivable to accelerate working capital through the sale of accounts receivable to a third party.

A bank loan requires businesses to take on debt and sets a strict timeline of when the borrowed money should be repaid. However, with factoring, the factoring provider pays the business upfront for their invoices at a discounted rate. The customers for that business will then pay the factoring provider back directly. Because of this, factoring allows business owners an option for loan-free, immediate payment.

According to the 2020 Global Factoring report, more than $3,000B changed hands between businesses and companies who provide factoring in 2014. By 2026, it is estimated that more than $4,600B will be handled in this manner.

When Should I Consider Factoring?

So, how do you know that factoring is the right step for your business? According to Faktorama, factoring can be useful in any situation where a company’s positive cash flow needs to be increased, including:

• Paying overdue payments
• Verifying and monitoring business partners
• Covering customers who are unreliable and/or do not pay on time
• Expanding products, employees, or any other aspect of business growth

The Four Types of Factoring

If you’ve decided that factoring is the best move to increase your cash flow, there are four types you can utilize:

• Recourse Factoring: The business must buy back any invoices that the factoring company is unable to collect payment on, leaving the business owner responsible for any non-payment.
• Non-Recourse Factoring: The factoring company assumes most of the risk of non-payment by the business’s customers.
• Invoice Discounting: The business doesn’t sell their invoices, but rather they are used as collateral for a loan.
• Maturity Factoring: The factoring company takes a credit risk and takes care of debt collection, providing payment to the business when the invoice is due.

In this article, we are going to focus on inventory factoring, a form of non-recourse, reverse factoring.

About Inventory Factoring

Inventory factoring is a form of non-recourse, reverse factoring. According to Trade Finance Global, reverse factoring, also known as supply chain financing, is a solution where the buyer assists their suppliers by financing their receivables. This is done using a more flexible method and at a lower interest rate than would be offered with traditional factoring.

When a business factors its inventory, it sells pending purchase orders for a discount to generate cash flow and to purchase inventory from its suppliers. Through reverse factoring of inventory, factoring companies can provide businesses with a way to improve positive cash flow. This is particularly beneficial for small and medium companies or businesses that have seasonal demand for their products.

“With reverse factoring, we are financing payables,” Jakub said. “That means that, when a company wants to buy inventory, pay for logistics, or any other expenses connected to the process of manufacturing and selling their goods, we as a factoring company pay on behalf of them. We pay all the payables for the inventory and logistics, so all the subcontractors and suppliers are fully satisfied by us. And, after 60 or 90 days, when the goods are already manufactured and delivered, they pay us back.”

How Faktorama Can Help Soapbox Customers

Because Soapbox can offer Faktorama viable information about customers’ businesses, orders, and inventory, Faktorama can then provide superior inventory factoring services.

“We can provide a superior offer to traditional factoring companies because we have access to extra information which we take into account in risk assessment,” Jakub said. “The better risk assessment that we have, we can offer a lower cost for financing and greater overall financing.”

Jakub said that, by only looking at a business’s finances, traditional loans can often overlook fast-growing companies and startups that should otherwise qualify for cash flow assistance.

“If you talk with entrepreneurs, many of them say that, at the very beginning, they were struggling to get financing from a bank because of their short financial history,” Jakub said. “The banks don’t take into account that the business has an extremely good product or service, banks are only looking at the past year’s financial statement. It's oversimplified, as they cannot see the precious gems of fast-growing companies. This is where we are here to help, because Faktorama assesses the financial situation by looking not only backward, but forward as well.”

To learn more about the basics of cash flow management, click here to check out our previous article.

If you’re looking for a business to help you with inventory factoring, Faktorama has got your back. Click here to head to their website and learn more!