Why E-commerce Factoring is the New Supply Chain Financing Solution

Though we tend to think of e-commerce as “the next big thing,” it’s more of an evolution, and one that will benefit just as much by using e-commerce factoring to speed up cash flow as manufacturers and distributors have done for hundreds of years.

The Role of E-commerce Factoring in the Modern Supply Chain

The Role of E-commerce Factoring in the Modern Supply ChainE-commerce isn’t new; rather, it’s a new way of doing business. The first e-commerce transaction (a sale that’s conducted via electronic rather than in-person, mail, or some other tangible channel) occurred in the 1960’s on what was called a VAN (value-added network), though it would not become part of the consumer’s lexicon for 30+ more years.

Two e-commerce giants that would become household words within two decades, Amazon and Ebay, both started humbly in 1995. Today, Amazon is the world’s largest e-commerce platform, primarily conducting business to consumer sales at the rate of $107.01 billion in 2015 to the nearly 172 million people that visited the site each month.  Ebay, a site that facilitates online auctions, was initially a consumer to consumer sales site and that remains its primary focus, though businesses do sell on the site as well. In 2015, Ebay had 162 million active buyers using the site, completing more than $8.5 billion in sales, $3.6 billion of that in the U.S. alone.

You might also like: Factoring for Amazon Sellers

From the first supply chain transaction where a manufacturer used a third party to distribute their goods in market places they could not reach themselves, to today’s digital selling landscape where supply chain business transactions connects sellers to buyers anywhere in the world, e-commerce is an evolution whose time has come. Just as generations of manufacturers and distributors have used receivables financing to expedite cash flow, e-commerce vendors stand to benefit too.

You might also like: One-Stop Guide for Selling on Amazon – 15 Reminders You Need to Know

The Role of Invoice Factoring in the Supply Chain

The Role of Invoice Factoring in the Supply ChainNow let’s talk a little bit about the history of supply chain factoring; for that, we’re going to have to go back several hundred years instead of just several decades.

Side note: In industries where receivables financing (another term for invoice factoring) is commonly used synonymously with the term, invoice factoring is well understood. Outside of those industries, many business owners have never heard of factoring; if you are one of those, don’t worry, you’re in good company!

Supply chain factoring was the first form of invoice factoring. Though it’s modern form first emerged as early as the 1400’s, its roots go back thousands of years to the Mesopotamian culture (ca. 3100 BC). The Code of Hammurabi actually contains not only records but even rules for factoring.

As a financing tool, supply chain factoring emerged concurrent with discovery and exploration of the world as shipping capabilities made it possible for manufacturers and traders to send their goods to the ends of known civilization. As those ends expanded, ultimately, opening up foreign markets worldwide. In order to get goods to market, manufacturers had to engage shippers and distributors. Rather than wait months (or years) for the money to come back from sales occurring in the far reaches of the world, manufacturers were able to sell those promised payments (today we’d refer to them as “invoices”) to bankers and financiers who paid the manufacturers a portion of the value.

Expediting a majority of the cash flow ultimately expected enabled manufacturers to reinvest in production instead of waiting months (or years) on payments. Bankers and financiers who bought the rights to those promised payments made a profit on their investment (today we would call this a “factoring fee”).

Supply chain financiers were so essential to manufacturers and so powerful, that the English government even passed an Act of Parliament in 1969 to mitigate their power. As supply chain manufacturers and distributors have grown, developed their own sales forces and built their own distribution channels, invoice factoring evolved to the form as we know it today, and is commonly used as a means of expediting cash flow for faster business reinvestments by:

  • textiles
  • transportation, trucking and logistics
  • manufacturing
  • distribution
  • oil and energy
  • utilities, cellular and cable equipment installation
  • staffing and temp employment agencies
  • food and beverage, including alcohol (wineries, beer and spirits producers)
  • and specialty factoring for construction, medical and real estate

Essentially, any business that sells to another business-type entity on terms might be able to use factoring to expedite invoice payment. Factoring allows businesses to get access to the money that would otherwise be tied up in customer invoices (or promised payments) for 30+ days from a third party (called a Factor, or factoring company) for a small fee, called a factoring fee. By expediting cash flow, the business is able to take on new business more quickly and they can use generous customer terms as a way to get more customers.

How Invoice Factoring Benefits the Supply Chain Business Model

How Invoice Factoring Benefits the Supply Chain Business ModelInvoice factoring speeds up cash flow, allowing for faster business reinvestment. For supply chain companies, using receivables financing as a cash flow management tool enables them to offset the multitude of expenses that must be met long before corresponding revenues are realized. For instance, a manufacturer must often pay vendors for raw materials, utilities, payroll, marketing, advertising, distribution and shipping weeks (or even months) before the goods produced are sold to businesses or to the retailers who make the final sale of these items to consumers. If that manufacturer must then wait 30 or more days to get paid, it could cripple their ability to take on new business. By factoring invoices, they speed up cash flow to unlock the money they need to pay vendors to produce the next round of goods.

The negative consequences of slow cash flow in business even has a name: opportunity cost (or lost opportunity cost). Opportunity cost refers to any business or growth opportunities that are lost because of a business decision. In this case, (lost) opportunity cost for a manufacturer represents any new business they cannot engage in because they did not factor invoices and speed up cash flow. Not only could slow cash flow delay or stall the manufacturers growth, it could also mean that competitors gain an advantage in being able to capitalize on the opportunities the manufacturer lost out on.

You can use an opportunity cost calculator to see how much working capital your business could unlock by factoring invoices (or promised payments) instead of waiting on payments. The good that this working capital could do, if unlocked, represents the opportunities lost if you choose not to factor invoices.

E-commerce Factoring in the New Supply Chain Model

E-commerce Factoring in the New Supply Chain Model

Today we live in a world where retail ecommerce transactions are beginning to occur at faster rates than transactions in traditional brick-and-mortar stores in some sectors. Ecommerce sellers include both manufacturers and distributors who, like their ancient counterparts, must outlay significant amounts of working capital long before corresponding revenues are realized.

Some of these ecommerce merchants sell to warehouses, distributors or directly to other businesses on terms. Others sell directly to businesses and consumers on third party platforms like Amazon, Ebay, Zulily and similar sites; however, they wait 30+ and sometimes 60+ days to get paid by the third party platforms.

E-commerce sellers who sell to other businesses and those who sell using third party platforms and wait for payment can use invoice factoring. When they factor invoices (or promised payments) with us, they get free, same / next day funding on advances up to 98% of the promised payment amount.

E-commerce factoring can speed up cash flowEcommerce sellers who choose not to factor invoices or third party platform payments will often wait anywhere from 60-90 days from the time a sale is made before recouping revenues against the cost of goods sold. for them, the lost opportunity cost is made up of anything they can’t do because slow cash flow means they don’t have working capital on hand.  Meanwhile, sellers that use ecommerce factoring as a cash flow management tool can get immediate access to the working capital needed to produce more goods and take on new business.

E-commerce factoring can speed up cash flow for entities such as:

  • Manufacturers who produce goods sold on 3rd party sites (Amazon, Ebay, Zulily, etc.)
  • Distributors who sell goods through 3rd party platforms
  • Manufacturers and distributors who sell to ecommerce retailers
  • Software and app developers
  • Agencies and business service providers (IT, SEO, content marketing, website developers, etc.) that invoice customers on terms or wait on retainers or installment payments

Manufacturers, distributors, software and app developers, and other producers with supply chain business models that choose to factor often do so for one of the following reasons:

  • They have customers with extended terms or slow-paying customers
  • Waiting on customer or third party platform payments creates cash flow lows
  • They want to extend longer payment terms to attract new customers or match competitors’ payment terms
  • They need to speed up cash flow to take advantage of emerging business opportunities, or to take on bigger accounts or meet expenses needed to fill bigger orders
  • Cash flow isn’t keeping pace with operational expenses or payroll
  • They want to take advantage of supplier’s or vendor’s early-pay discounts
  • They need to reinvest in their company more quickly

Benefits of E-commerce Factoring

E-commerce factoring speeds up cash flow. Using receivables financing as a cash flow management tool gives you the ability to reinvest in your company more quickly and ensure that revenue can keep pace with expenses. Many companies use “spot factoring” or factor only occasionally to cover payroll and other expenses during a low cash flow cycle, an option that’s also available to our ecommerce factoring clients. Speeding up cash flow by factoring ecommerce payments and invoices can help your business:

  • Ensure adequate cash flow during low cash flow cycles (or all the time)
  • Meet operating and payroll expenses more easily
  • Take on new business more quickly
  • Leverage generous customer terms as a competitive advantage
  • Negotiate or take advantage of supplier’s quick-pay discounts

Overview: E-commerce Factoring with My Factoring Brokers

E-commerce Factoring with My Factoring BrokersIn addition to the benefits cited above, choosing the right partner for e-commerce receivables financing comes with added value for direct and 3rd party platform sellers. Our factoring fees are very low and we don’t tack on hidden fees; when factoring e-commerce payments with us, your factoring fee (which could be as low as 1%) will usually be your “all in” cost for receivables financing.

We also provide free, same-day funding for ecommerce vendors on the invoices or payments they factor with us. Instead of waiting 30, 60 or even 90 days to get paid after a digital sale occurs, you can get an advance of up to 98% of the amount on the same day an invoice is generated, or a statement of promised payment is issued by the 3rd party platform.

You can also enhance the benefits of ecommerce factoring services even further with non-recourse factoring. When you factor with a non-recourse factoring company, they assume the credit risk from bad debt on the invoices factored.  If your customer can’t pay due to insolvency, the non-recourse factoring company takes the loss, not yours.

Here’s the type of perks we can help you find in ecommerce factoring programs:

  • E-commerce factoring fee (the cost of receivables financing) starting at 1%
  • Fast same / next day funding, factoring advances up to 98%
  • No application, due diligence, notification, schedule processing or other hidden fees
  • Program transparency
  • Fast approvals – looking for reasons to say “yes!” instead of no
  • No low introductory factoring rates that expire
  • No long term contracts or lengthy auto-renewal clauses
  • Protection from bad debt – reduced financial risk with non-recourse factoring
  • No factoring minimums (you can factor ecommerce payments all the time or only when you think it’s best for your company)

Essentially, we work with ecommerce factoring programs that can be tailored so that it’s easy, fast, and keeps our factoring clients in control so they can do what’s best for their companies. As our client, you will enjoy these same benefits, delivered with the utmost in professional customer service. We want to help you grow your ecommerce business to the next level as quickly as possible!

Apply for E-commerce Factoring or Supply Chain Financing Options

Request a free, no-obligation proposal by submitting the form below. We would be happy to talk over our program with you so you can determine if e-commerce factoring is an appropriate tool for your company.

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