How happy most business owners become when the news arrives that Home Depot (HD) wants them to supply product to their stores.
Certainly this type of customer has incredible creditworthiness, moves product very consistently and orders large quantities regularly. What could be the down side?
HD requires that their vendors issue terms on their invoices so that they can take advantage of the “interest free” financing that payment terms provide.
What is the interest free financing one might ask? Very simply you are giving HD the product and they can still use the money owed to you for 30, 60 or even 90 days.
It is essentially your money that they are using which, when one examines the process, is essentially the vendor lending money to HD-NO INTEREST.
As orders increase and the need to provide more products to HD, a small to mid seized business can easily run out of working capital in order to fulfill more orders.
The vendor is now boxed into a corner because 1) the vendor agreed to these payment terms,
2) one cannot call HD and pester them for payments especially if the terms are being followed by HD (or closely adhered to),
and 3) the vendor certainly cannot afford to ruffle the feathers of HD by putting pressure on them for payment even if time has passed beyond the payment terms.
The most common form of help many vendors to the “big box” stores use is a finance strategy called factoring.
Essentially factoring is the sale of these invoices which puts the vendor on almost a C.O.D basis. The vendor gets cash once delivery is made to, and confirmed by HD.
This allows for quick cash flow recovery and inventory or product replacement. The cost of this financing vehicle is a small percentage of the invoices being financed/sold.
Vendors to the big box stores find that they really cannot function well unless they can decrease the time from delivery to customer payment.
Factoring is almost indispensable for these businesses.
