The high retail turnover in the CE market creates challenges for product vendors. Understanding your asset-based lending options can help you navigate that landscape and free up resources for growth.
Today’s small and mid-sized Consumer Electronics (CE) vendors face a new inventory/turnover scenario. Vendors are maintaining historically low inventories to preserve financial flexibility in the face of changing and more unpredictable CE market shifts. Ever-evolving advances in technology make vendors wary of keeping too much inventory on hand. Meanwhile, retailers are turning over inventories at historically high rates. It’s not unusual for a big box retailer to turn over inventory three times before the CE manufacturer gets paid.
This new scenario makes it difficult for CE vendors to fund inventory when the cash conversion cycle is stretched. Yet not shipping products to a large account is something a vendor can’t risk, even if that account hasn’t paid the pending invoices on previous orders. Vendors also need to be able to quickly finance production to exploit a new tech trend and to fill orders from other retail customers.
It’s all about cash flow and logistics. But even though you feel cash-squeezed, you can still find the resources to manage current orders, as well as your financing needs.
Leveraging Your Assets to Manage Inventory and Growth
Your first instinct when inventory needs arise—while your cash reserves are low—may be to go, hat-in-hand, to a bank for a loan or line of credit. But a bank might not understand your business needs. Furthermore, any financing that comes from these sources will likely lack the flexibility to meet your constantly shifting needs.
Another inventory funding option is to sell or borrow against the equity in your business. But there’s only so much of your company you can leverage before you risk losing control of it.
An attractive alternative is to borrow against your assets: accounts receivable and inventory. Companies like CIT Commercial Services (CIT) allow you to leverage your inventory and the open invoices on goods shipped to your customers by using them as collateral to obtain advances. Accounts receivable could potentially generate up to 85-90% and inventory up to 50% or more of their value to help you support your financial needs. When invoices are paid, CIT will use those proceeds to lower the loan balance to minimize your interest expense. That, coupled with competitive interest rates, results in a compelling alternative to obtain the funds you need to meet your financial obligations.
In addition, your borrowing ability should grow as your company sales and receivables grow. Borrowing against your assets means not needing to submit a request for a line increase as you typically would with a traditional bank.
Completing the Business Cycle
Obtaining cash is only half the equation. You still need to collect your payments. CIT helps you recoup your outlays and complete the business cycle. How? We help to make sure the retailer you sell to can pay for what they order, by underwriting a customer for a discretionary credit limit and providing protection to mitigate credit risks. If you’re selling to a new customer, chances are that our credit department knows them, which speeds up your business cycle. If not, our credit department can often perform the initial credit investigation to help establish a credit line.
In addition, after decades of experience and thousands of transactions, CIT has developed relationships with large and small retailers across the country. As a result, we can obtain payments in a much more effective fashion than a small or mid-size vendor can accomplish in house.
By providing a flexible asset-based lending product, combined with faster, more effective collections, and worry-free credit protection on qualified customers, CIT enables you to concentrate on growing your business with fewer financial headaches. That leaves you with more bandwidth to design and manufacture “the next big thing.”
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For more information on consumer electronics industry operational finance best practices visit the CE Financial Strategies Center.
Niraj Lal is a business development officer at CIT Commercial Services specializing in factoring and asset-based lending solutions for consumer product companies including consumer electronics, housewares, and apparel.