Accounts Receivable Factoring vs. Lines of Credit: Cash Flow Solutions for LBM Suppliers

Building material suppliers often face unique financial challenges due to the volatility of the economy and the cyclical nature of the construction industry. To combat any cash flow issues, suppliers will often turn to factoring their accounts receivable or offering their customers lines of credit. While either method will result in money on the table, each has significantly different effects on the supplier’s business and success.

Method Similarities

At a glance, lines of credit and accounts receivable factoring may seem very different, but there are a few similarities between the two.

1. Speed Factor: Both lines of credit and factoring can be relatively quick processes, especially when utilizing specialized financing software.
2. Improves Cash Flow: Both methods allow suppliers to be paid upfront for their invoices, albeit through different methods, therefore improving the company’s overall cash flow.

Accounts Receivable Factoring: A Fix with Flaws

Factoring is a way for LBM suppliers to access any funds that are tied up in accounts receivable by essentially selling them to a third party at a discount. While this may seem like a quick fix, there are also some significant pitfalls.

1. Limited Return: Factoring companies make their money by charging factoring fees, services fees, credit check fees, and more, usually leaving the LBM supplier to receive as little as 80% of the total of their factored invoices.
2. Loss of Control: Since factoring involves selling accounts receivable to a third-party company, LBM suppliers lose control over the collection process and those particular customer relationships. In the construction industry, where personal relationships often play a significant role, this loss of control can be a significant drawback.

Lines of Credit: Flexible and Customer-Friendly

By offering lines of credit to their customers, LBM suppliers are able to improve their cash flow while enhancing their customers’ experience. Here are a few reasons why lines of credit are a strong choice for the LBM industry:

1. DSO Reduction: By offering customer financing to trade customers, suppliers get paid upfront for their invoices, which lowers both their risk and the stress associated with dealing with unpaid invoices while also potentially lowering their Days Sales Outstanding to one day.
2. Clarity: By offering lines of credit, LBM suppliers can easily reconcile their accounts clearly by keeping all accounting in-house. When a third-party factoring company is involved, some of these financial records may be kept under wraps, leading to confusion over the exact financial state of the supplier’s company.
3. Cost-Effective: Lines of credit usually offer clear terms and pricing models that work for the supplier’s customers at a much lower cost than factoring. By utilizing competitive interest rates, LBM suppliers can offer their customers higher approval rates and lower fees, giving them an easy way to finance their purchases without sacrificing control over project decisions.
4. Better Customer Experience: Suppliers can maintain a loyal customer base by offering the best payment and trade credit experience, benefiting both the supplier in terms of cash flow and the customer in terms of material availability and project completion. The supplier maintains their relationship with their customers while simultaneously giving them faster access to financing.

In summary, lines of credit stand out as the superior financing option for building material suppliers in the construction industry. They provide unmatched flexibility, clarity, cost-effectiveness, and long-term growth potential. These benefits empower suppliers to adapt to the ever-changing construction market, manage cash flow effectively, and maintain strong relationships with their clients. Building material suppliers can confidently rely on lines of credit to support their business's success and growth in the dynamic construction industry while avoiding the complications and costs associated with invoice factoring. At BlueTape, we specialize in helping building material suppliers improve their cash flow and bottom line through lines of credit. Ready to take your business to the next level? Create a BlueTape account now or book a free meeting with one of our team members.