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The process of invoice factoring works in just a few simple steps. When an invoice is created, you sell it to the “factor” at a discounted rate – usually about 3 to 5 percent off of the invoice total. Factoring means you do not have to wait for the customer to pay to start collecting money from the invoice.
First you, the business owner, notify the factor that the invoice has been created. Usually this can be done electronically. You provide the customer's contact information to the factor, and the factor will confirm the invoice with your customer.
Typically, invoices are confirmed with a simple letter or phone call. Usually the factor appears to your customer to be a billing processor or department, confirming the invoice on your behalf. This way, the customer does not realize you have sold your invoice to a third party.
Some invoice factoring companies are willing to remain completely invisible to your customers. And after you have established a relationship with your factor, and they are more familiar with your business and your customer base, they will likely stop confirming every single invoice.
After the invoice has been confirmed, the factor pays your business what is known as the “advance rate.” This is a percentage of the invoice total, typically around 70 to 85 percent.
The factor then collects the total amount of the invoice from your customer. They keep their 3 to 5 percent, and forward the rest of the total to you.
Invoices factoring increases your business' working capitol and helps improve the credit rating of your business. And, when factoring your invoices, you are in control. You decide which invoices to factor and which ones to collect yourself, based on your relationship with your customer base.
Have you just recently started up your business? Are you finding it difficult to build enough working capitol to run your business day to day? Invoice factoring can work as a bridge to get you over the rough waters after start-up until your business is able to run smoothly.
And, if your business has poor or no credit history, invoice factoring is an option to consider if loans or liens won't work for you, or if you consider them too risky.
A steady, reliable cash flow is necessary for any business to operate smoothly. Worrying about your cash flow also causes business owners more stress than almost any other aspect of their business. Invoice factoring allows you to stop worrying. It is the simple, fast way to increase cash flow now.
Overstock situations rarely happen overnight. They occur gradually and build month by month. The problem is, the slow buildup makes them difficult to identify and resolve. Small retailers often fail to notice that they're carrying dead inventory until the problem has spiraled out of control. By that time, if cash flow is an issue, they're forced to take costly markdowns. If they're desperate, they may even need to unload their stock to liquidators for pennies on the dollar.
Below, I'll provide a few helpful suggestions for dealing with dead inventory and turning it into valuable cash flow (without turning to liquidators). While the solutions may not be quick or painless, they are effective.
Ask Your Vendors If They'll Accept Returns
Vendors are understandably loathe to take returns. However, if you position your request properly, they'll be far more open to the idea. First, you should make it clear that returning excess stock will not become your new method of operation. Second, think of ways to frame your request to make it more appealing for your vendors. For example, you might agree to give them more shelf space on your floor, or to try out a new product line they have been pushing.
You should also remind them that a severe cash flow problem on your end could impact future purchase orders. In effect, accepting returns from you can help insulate their own businesses.
Categorize Your Excess Merchandise
Despite what many independent shop owners think, overstock is not always the result of items turning over slowly. The problem is often with inventory overages that go unnoticed month after month. Those overages can occur in any category, including those which sell quickly as well as those which seem to stubbornly stick to the shelves. You can generate cash flow by segmenting the overstock according to your past turnover data.
Focus on moving the merchandise that has proven to sell through quickly in the past. Build promotions around those items. Feature them in high-traffic areas on your floor. Discount them slightly (no need for a drastic markdown yet). At the same time, realize that some of your overstock will be found in categories that will not move, regardless of your efforts. Rather than allowing it to consume valuable floor space, consider marking it down or donating it. Do whatever is necessary to move it. At the very least, that will free up space for merchandise with a stronger sell-through.
Use Your Dead Inventory As A Loss Leader
Small retailers have a tendency to fixate on the amount they paid for their dead inventory. They often convince themselves that it would be unwise to let the merchandise move for less than it cost them, even if there's little chance of it moving for more. Meanwhile, the overstock continues to take up floor space without generating cash flow.
Consider using the excess merchandise as a loss leader; mark down the price to draw people into your store. To be sure, this strategy is tough medicine to swallow. However, if you're dealing with dead inventory that refuses to move, you may as well put it to good use. Ignore what you paid for it and price the overstock to entice customers. With a little luck, they'll take it off your hands while buying other items during their visit.
As an independent shop owner, cash flow is critical to your survival. Tying it up in excess inventory, especially in merchandise with a slow sell-through, can be disastrous. If you're dealing with an overstock situation, talk to your vendors about returns, focus on moving the fast-selling items, and put the dead stock to use as a loss leader. It may be slow, it may be painful, but it will reduce your overstock and generate precious cash flow.