Consumer Products Business Solutions: Finding Financial Stability Through Invoice Factoring

With consumer spending sluggish in 2023 and only expected to cool, consumer goods companies’ best financial tool may be invoice factoring. Marius Silvasan at eCapital explains how invoice factoring can help consumer products businesses navigate interest rate hikes, supply chain disruption and dwindling consumer spending.

BY MARIUS SILVASAN, CEO, ECAPITAL

Businesses of all sizes, from corner stores to those on the Fortune 500 list, are adjusting to new realities in 2023. Rising interest rates have yet to cool inflation and global supply chains continue to navigate the complexities of shortages, overstocking and the impact of international conflicts. As a result of these and other factors, first quarter consumer spending in 2023 was the weakest since the pandemic and continued to slow in the second quarter. Following a brief mid-summer surge in spending, experts predict consumers will again curtail their spending habits in the latter half of 2023 and well into 2024. 

Operating under these new pressures, businesses producing consumer goods are now bracing for reductions in order volumes and, in some cases, lost clients as the current economy continues to take its toll. It’s a less-than-ideal business horizon, but by establishing financial stability and making strategic business adjustments, the best operators will come through this downturn stronger and ready to ride the next surge in spending.

During these less certain times, one of the most essential aspects of business sustainability lies on the financial front: consistent and stable access to working capital. As retailers and distributors feel the pinch of 2023’s economic challenges, inventories will continue to lag and payment terms will lengthen. Manufacturers are therefore left to fine-tune their production schedules and bridge the gap between orders in process and revenue in the door.     

Financial technology companies structured to provide fast and flexible access to working capital are well-positioned to provide the financial support that consumer goods businesses need to ride the rough road ahead. Among the many working capital solutions these alternative lenders provide, invoice factoring continues to grow as a preferred funding solution in the consumer goods space.

The Fintech Response to Rising Interest Rates

Business financing is essential to most businesses. It is typically used to access working capital, purchase assets, support growth, or restructure debt. As interest rates increase, so too does the cost of money. Immediately following the brunt of the COVID-19 pandemic, the federal funds rate fell as low as 0.5%, and lenders across the board quickly approved business loans. That was then, and this is now. Today, the federal funds rate sits at well over 5% and may go higher still. The cost of debt is up significantly, and access to loans is diminishing as conventional lenders become more cautious.

The fintech response to rising interest rates is to push forward with a focus on invoice factoring, an easy-to-access source of working capital less impacted by rate fluctuations. Invoice factoring is not debt financing; it is the selling of invoice receivables in exchange for immediate cash. It is an easy-to-manage financing option with little lender oversight and minimal loan covenants. As competing businesses struggle to make payments on rising debt obligations and work diligently to comply with loan covenants, companies financed with invoice factoring facilities can avoid these pressures and gain more capital management independence.

Weathering Continued Supply Chain Disruptions

Persistent supply chain disruptions and rising costs continue to cast shadows over business operations. Two supply chain scenarios have emerged: pandemic-induced scarcities causing shortages, and the challenge of excess overstocking. This issue is particularly prevalent in the transportation sector, which witnessed a dramatic increase in number of shipments during the pandemic era to replenish supply chains but more recently has faced a substantial reduction in the number of shipments resulting from overstocking and falling demand. Disruptions are further fueled by geopolitical conflicts, inflation, the task of maintaining workforce levels, severe weather, skepticism about cross-border cooperation and heightened cyber-criminal activity. All these factors are increasing the need for companies to remain agile.

In business, adaptability is often determined by the resourcefulness of management and the organization’s financial strength. Access to the working capital needed to improve order management, maximize inventory planning and diversify supplier networks allows companies to better predict and react to changing conditions. 

Reliable cash flow is at the root of financial strength. Invoice factoring provides reliable and predictable cash flow, giving a company the strength to plan and implement new strategies quickly and efficiently. Having foresight and financial agility enables companies to adapt rapidly, a competitive advantage in a changing market.

Keeping Afloat as Consumer Spending Lags

Consumer spending has lost steam for most of this year. A brief surge in June brought some optimism as consumers worked through some pent-up demand from the pandemic, with travel and restaurants topping priorities for many. But as further interest rate hikes continue to work through the economy, experts anticipate additional cooling in consumer spending. The Conference Board is forecasting a contraction in Q4/23 and Q1/24 as consumers bear increasing strain, particularly on the borrowing front.

As soft consumer demand fluctuates between moderate and low, consumer goods businesses must continue to rely on their working capital to see them through the financial gaps and bumps that are on the horizon. Maximizing cash flow efficiency to sustain operations, pay bills and meet payroll burdens will continue to be a significant challenge for the next four quarters until consumer spending strengthens. But once again, invoice factoring can provide the conduit to a better future by reducing a company’s reliance on debt and putting accounts receivable into action to keep things moving.

An Eye to the Future

In a tough economy, many financial professionals regard cash flow as more important than profit. As the economy struggles to regain momentum, stressed companies need a reliable source of financing to overcome funding gaps and keep the wheels of commerce in motion. Invoice factoring maximizes cash flow efficiency, ensuring easy access to the working capital needed to meet financial obligations. This process fast tracks invoice payments, turning days sales outstanding from weeks or months into a few hours. With funds flowing quickly back into the company reserves, working capital is made immediately available to fuel ongoing operations, meet financial obligations and support investments in efficiencies.

The immediate future may be full of financial challenges, but a sustainable path to a more profitable future is made possible for consumer goods businesses with a flexible financing structure based on invoice factoring.