Does the blocked Suez Canal have anything to do with factoring? How payment "backlogs" hinder business
In the last days of March 2021 there was a blockage of the Suez Canal by the container ship Ever Green. The blockage not only caused huge transportation problems and huge financial losses but also showed how the lack of "flow" caused by this accident can affect many areas of life.
The case is similar when managing liquidity in a company. Lack of payment can create many problems not only for the company but also for business partners. Today's realities force entrepreneurs to sell goods with deferred payment terms. Of course, these terms vary depending on the industry, but 60 or even 90-day payment terms are slowly becoming commonplace. It should be noted that these 90 days are from the sale of the "already produced goods" and issuing of the invoice. However, the production of the goods takes, for example, another 30 days. Thus, at the very beginning, the company has to freeze cash for 120 days and wait until the contractor pays for the goods. In the meantime, the entrepreneur has to pay his bills, employees' salaries, or credit and leasing installments. Another problem arises when counterparties stop paying on time and a payment backlog appears.
This leads to problems that can become increasingly acute, and the company's reputation suffers as it is no longer able to meet its obligations. Lack of liquidity can, in the worst cases, lead to the collapse of the company. The so-called butterfly effect arises; one event in the form of a lack of timely payment from a business partner causes a series of undesirable actions. In this case, factoring can be of help, where an entrepreneur with a factoring agreement, after submitting the invoice to the system, receives funds on its bank account within several minutes. The whole transaction can be additionally secured by an insurance company, as a result of which the risk of the contractor's insolvency is transferred to the insurer. This service allows you to maintain liquidity, and consequently to pay your liabilities on time.
It is worth remembering that these bottlenecks in business or operations have happened, are happening, and will continue to happen, so it is worth being prepared for them.
Factoring Product Manager at Comarch