If you are a business in the ever-changing manufacturing sector and are in need of cash to improve your cash flow, meet seasonal production demands or manage rapid growth, you can get the cash you need quickly, from an inventory financing loan or from factoring accounts receivables.
Benefits of Factoring Receivables
Often used interchangeable, both the terms invoice factoring and inventory funding are actually not the same thing though they both are alternative financing methods where your business can get cash quickly to move forward and continue standard business operations. With a long history in manufacturing, factoring is when the company sells its existing invoices to a third-party invoice factoring company, giving the company the cash it needs right away (usually in less than 48 hours). A factoring company, such as Business Factors, Inc, then takes over the responsibility of collecting on those invoices. As such, with the factoring receivables process, your clients (those who are invoiced) will be assessed for their creditworthiness and reliability rather than your company.
Advantages of Inventory Financing Lenders
Inventory funding, on the other hand is most similar to a short-term, one-time loan though similar to accounts receivable factoring you can get your cash quickly. So if you need cash fast to purchase new inventory as part of your manufacturing production cycle, you can actually use that inventory itself as collateral to buy the inventory. This differs from standard term bank loans that require you to use your existing property, assets, or equipment as collateral for that loan. The catch with financing inventory, and this is key, is that if you fail to deliver on the loan according to the terms set forth in your contract, you could be required to forfeit that inventory.
Misunderstandings with Receivable Factoring
Though it is a common misconception, factoring accounts receivables is not a loan and therefore does not require you to use your inventory, machinery or anything else as collateral. Since you are selling your existing invoices directly to the third-party factoring company, it is considered a transaction unto itself. With factoring services you are not putting your future earnings on the line for your current situation as you are with inventory funding.
An additional differentiation between Invoice Factoring and Inventory Financing is the former is generally set up on a regular month-to-month cycle for a certain period of time such as a year. An Inventory Financing Loan, however, can be used more on an as you need it type of scenario so it may be a good option if you see yourself needing a cash infusion only once a year or so.