Acquiring and distributing produce is a business in which cash on hand is extremely important.
Because transactions with growers require near-immediate payment, smaller distributors who don’t have a lot of cash on hand often find themselves in a tight position. It can be complicated and slow (and often impractical or impossible) to acquire traditional bank lending and financing. Instead, produce distributors can benefit greatly from the alternative financing method of factoring their receivables.
Factoring is an established financing option in which a business sells its accounts receivable at a discount to a factoring company, generating an immediate infusion of cash into the business.
The majority of the invoice value (typically 75% to 90%) is advanced within 24 hours. The remainder of the invoice value, minus the factor’s fee, is released at the time the final buyer pays the invoice.
The typical produce transaction begins when a distributor places an order with a grower, sending a deposit for the order that is between 5% and 25%. That deposit, often called pick and pack money, is used to harvest the produce, bring it in, sort by size and pack them.
Liquid Capital sends documents to growers at this time, guaranteeing that we will send them the rest of their payment as soon as the final buyer accepts the product. This way the grower can feel secure in the transaction.
Much of the produce we consume is grown in Mexico, so each shipment is inspected when it reaches the U.S./Mexico border. It is also graded, priced and then sent to a warehouse where it is either shipped to — or picked up by — the final buyer.
Because these are perishable items, the customer or carrier inspects for quality and accepts the product or notes problems on the bill of lading.
When the distributor invoices the final buyer, we factor (purchase) the invoice, pay the grower out of the funds generated and remit the remainder to the distributor. For our distributor-clients, there is an additional benefit to our paying growers: If you’re a produce distributor, PACA is important.
Under the Perishable Agricultural Commodities Act, growers can sue distributors (and their factors or lenders) if they are not paid in a timely manner. Banks can be reluctant to lend when there is that kind of vulnerability. However, because we pay growers directly, we help protect our clients from accidental violations.
Factoring gets these smaller distributors cash quickly and provides them with someone to oversee the process of sending money to a foreign country. It is a secure, fast and safe way to make sure your company always has the capital it needs.