Factoring 101 Blog - Acounts Receivable Factoring and Other Industry News

Making the Leap from B2C to B2B

When bringing a new product onto the market, it is very common for a business to initially sell directly to consumers as they are trying to get the product established. This may be done through their web site, or if they own a retail store, they may even sell it in their store. Some businesses may even invest in becoming third party sellers on Amazon Marketplace, Etsy, or other online marketplaces. However, if a company truly wants to expand their reach and start selling their product in larger quantities, the key to doing this is to make the change from strictly B2C (business-to-consumer) and start selling B2B (business-to-business). This can be a daunting task, and finding customers who are willing to sell your product is never easy. Should you succeed in finding customers, you now need to ramp up production of your product, and that of course requires funds that you may not have access to.

Selling B2C

Selling your products directly to consumers is a fairly straight forward process. You put your product out there and if someone likes it they give you a credit card and you send them the product. Of course, it really isn’t that simple. You first need to find a way to advertise your product and make consumers aware that your product is not just out there, but is something that they need or want. You also need to have inventory on hand, and paying for this inventory can be very challenging for any business, young or old. However, if you are only selling to consumers, your inventory can be kept at a fairly low level, you maybe only need a few hundred items on hand, and once those start selling, you should be able to order additional inventory as needed. If you can afford to do this, and your product is selling, you may be able to make a nice profit. However, it is difficult to grow your business if your sole focus is direct to consumers. While there are certainly exceptions, it is doubtful you will be able to make a living simply selling your product direct to consumers.

Selling B2B

If you are looking to take your business to the next level, you will need to start selling to retailers, whether they be online or brick-and-mortar. This is no easy task as you not only need to find retailers who can sell your product, but you need to convince them that they will sell your product as well. However, don’t let that deter you, every product you see on the shelf at a store started off in the same place you are now, so there is no reason that you can’t get your product onto those same shelves.

Unfortunately, while making a sale may seem like the hardest part of growing your business, and it probably is, it isn’t the only obstacle in your way towards success. Once you start selling to retailers, the amount of inventory you need to have is going to grow, and you are probably going to need financing to help you acquire that inventory. If you are selling to smaller retailers, most likely they are only ordering a few units, which shouldn’t cause too many issues so long as you’re only selling to a few shops. However, getting a large order from a major retailer may put you in a position that you have never been in before. They might be ordering more units than your total sales since starting your business, and you may find yourself struggling with how to pay for the additional inventory required. On top of that, they are going to want to receive payment terms, typically this means that they won’t pay you until 30 days after you shipped the order, although sometimes it could be 60, 90, or even 120 days. Telling them you don’t have the funds to acquire the inventory, or that you can’t afford to wait to get paid is not only going to result in them canceling your order, but will probably result in them never wanting to do business with you again. You don’t only lose that customer, but you also lose the ability of other retailers to discover your product in their competitor’s stores and start placing their own orders. This doesn’t mean that you shouldn’t be looking for large orders, it just means that you should be looking for financing.

Financing for Growing Businesses

Finding financing for a business that is expanding into new territory may seem intimidating. You don’t have a track record to qualify for a bank loan or line of credit. You may be able to find an investor who is willing to help you out, but doing that would mean giving away part of your business and needing to answer to someone else. Luckily, there is a way for a small, growing business to obtain financing and it is called accounts receivable factoring.

Accounts receivable factoring is basically selling your receivables, or invoices, to a factoring company when your customers request payment terms. Instead of waiting 30 days or more to get paid for your merchandise, your factoring company will fund you the same day you ship the merchandise to your customer. However, there is much more to factoring than just speeding up your cash flow. The last thing you want to do is sell your product to a store that isn’t going to pay for it, if the store you sell to goes bankrupt, goes out of business, or if they are simply deadbeats, you are stuck with a worthless invoice and are out the money for the product you shipped them. Luckily when you factor your invoices you solve this problem. Your factoring company is responsible for performing credit checks, and if they offer non-recourse factoring, they even insure your invoices against non-payment. They also handle all of the collection work for you, so you don’t need to worry about having to call your customers when an invoice becomes due and you want them to pay you, your factoring company has professional collectors that will do this job for you. Best of all, since your factoring company is purchasing your receivables, you aren’t taking on any debt. The funds you receive from your factoring company are yours, and you can spend them anyway you wish.

Of course, there is a cost to factoring, no form of financing is ever free, but factoring is actually very affordable. Typically, a factoring fee is very comparable to a credit card processing fee. So if you have already been taking credit cards from consumers that have been purchasing your product, you can factor your receivables to businesses and it will have a very similar cost. When compared to the cost of attending a trade show, or hiring sales reps, factoring is one of the most affordable services needed to grow your business.

But How Do I Pay for Inventory?

By now you have probably realized that if you don’t get paid until an order ships, then you are responsible for coming up with the funds required to purchase the inventory needed for a large order. There is a simple solution for this as well. Many factoring companies offer something that is called purchase order financing. With purchase order financing, your factoring company will provide you with a short-term loan based on a purchase order you received so that you can pay your suppliers to produce the order. While purchase order financing does involve your business taking on debt, the great thing about it is that you won’t need to write a check in order to pay it off. Instead, when you factor the resulting invoice, your factoring company will apply a portion of the proceeds towards the loan they gave you, and will fund you the balance. So if you borrowed $6,000 against a purchase order worth $10,000, then when you factor the resulting invoice, your factoring company will apply $6,000 towards the loan they gave you and fund you the remaining $4,000, minus the cost of financing of course.

How Do I Qualify for Factoring?

Qualifying for factoring is simple, so long as you have receivables you qualify. Factoring companies base their credit decisions on the strength of the customers you are selling to, as it is ultimately your customers who will paying them back. As a result, even startups can qualify for factoring, and there are no limits to how much funding you can receive. The application process is simple, and most factoring companies can have you setup within 24-48 hours after receiving your application and any other required documents.

If you want to learn more about how factoring can help your company grow, give DSA Factors a call today at 733-248-9000 and learn just how easy factoring can be. Even if you don’t have any large orders yet, now is still a great time to speak with us to learn more about factoring works and how it can help your business.

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