Marco Terry

How to Use Factoring to Finance your Food Distribution Company

Learn how invoice factoring financing can be used to finance a growing food distribution company. Factoring is an alternative form of financing.

Food distribution companies tend to be cash flow intensive, They are constantly receiving products from suppliers, delivering products to clients, paying vendors and collection on invoices. This activity doesn't always flow very smoothly - at least as cash flow is concerned. For example, it's very common for small and midsized companies to have to pay their vendors in 10 days or less. At the same time, when they make a sale, large corporate clients insist on paying their invoices in net 30 to net 60 days.

This creates a discrepancy between the outflows of money (vendor payments) and inflows of money (invoice collections). The cash flow gap can cause serious problems unless managed correctly. At first most business owners try to juggle vendor payments - perhaps delaying some for a few days. If your business if growing, this strategy will not work for the long term.

A better alternative for some is to get business financing and use it to cover operations while waiting to get paid. One challenge with this strategy is that business loans are hard to obtain. Applicants need to have very solid financial statements, sufficient assets and an experienced team in place. These requirements put a business loan out of the reach of most small and medium sized food distributors.

There is an alternative way to solve this cash flow problem - and it's easier to get than a business loan. It's called invoice factoring. Factoring provides an advance on your net 30 invoices, providing the funds you need to operate the company while waiting for your clients to pay. The transaction is facilitated by an intermediary called a factoring company and the transaction is settled once your client pays the invoice in full.

To qualify for factoring, you must have a business that is free of judgments, liens and encumbrances and you must work with credit worthy clients.

Factoring provides predictable cash flow and frees the owners to spend their time where it gives the best return - growing their business.

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