"Factoring: A Vital Source of Cash to Keep A Supply Chain Moving." - Journal of Corporate Renewal
The success of nearly every business is dependent on its supply chain. Whether a neighborhood restaurant securing fresh produce from a local farmers market in time for tonight’s menu or a high-tech manufacturer which procures microchips from Asia ordered months in advance, a business will quickly fail if it is unable to reliably obtain the components of their product in time to meet their customers’ expectations. There are myriad conditions which can disrupt that supply chain. Some of which can be as isolated as local traffic delaying a delivery truck on the last mile of its journey or as far-reaching as a natural disaster which can close ports or destroy the facility of key supplier causing a disruption which may require a business owner to rethink how it acquires its inventory going forward. Over time, to reduce costs and increase efficiency, the links in many supply chains have become increasingly specialized. This customization has resulted in their rigidity. A supplier of one specific component can often not readily adapt to supply others. During the (hopefully) once-in-a-generation supply chain disruptions brought on the COVID-19 pandemic, many were surprised to learn that the factory which produces toilet paper for sale to commercial property managers cannot easily adapt and package their product for consumers, or the meatpacking plant which can cut and package chicken for bulk sale to restaurants has no simple way to prepare that same poultry for sale to supermarket shoppers. This inflexibility can at times result in a business having fewer options to fill an unexpected gap in their supply chain, putting suppliers in a powerful position to place, at times, onerous demands on their customers. Those demands can severely disrupt a business. Knowing substitutions for their product are limited, suppliers may prioritize their top customers, making it harder for smaller customers to procure necessary components. In other cases, suppliers may require large deposits with orders or refuse to offer payment terms at all to customers, insisting upon payment up-front with a purchase order. These payment conditions will create a demand for cash earlier in a company’s production cycle. This demand can be met in a few ways. If the business is highly profitable, it may generate sufficient cash from operations to satisfy this cash needs. In other cases, a business will have access to a line of credit from their bank or an asset-based credit facility from a non-bank lender to meet these cash needs as they arise. However, most readers of this publication tend to have clients who are not flush with cash or those which may have a lender in place today who is no longer comfortable with the performance of the business and is reducing the size of their credit facility or pressuring them to find a funding alternative. For those clients, factoring may be their best option to meet the cash flow challenges presented by their supply chain.
