You may or may not agree we are technically still in a ‘ business credit crunch ‘ but you probably will agree that your Canadian firms ability to factor purchase orders and arrange inventory finance is still a major challenge . Is there any solution, traditional or otherwise, to this ongoing Canadian business financing challenge? We happily tell clients there is, it’s just a case of having the right knowledge and ensuring you qualify for such financing. And you may find that due to the specialized nature and experts in this industry that are available, that it is not as hard as you thought!
Traditional sources of purchase order factoring and inventory finance are the Canadian chartered banks. To qualify for such financing the pre requisites are very clear – a decent balance sheet and income statement, growth prospects, profitability, potential external collateral, and the guarantees of owners and shareholders . Easier said than done, right?!
Purchase order and inventory financing can provide you with the working capital and cash flow to grow your company. It is simply a case of securing this type of financing, but at the same time recognizing that that costs and methodology around this type of financing makes sense for your company.
By assigning or selling your rights in the purchase order to a specialized inventory and p.o. financing firm your supplier is guaranteed payment of goods that you require to fulfill orders and contracts. When your supplier is paid goods or product is shipped to yourself, or potentially your customer, less a financing fee, which is typically in the 3% range. That fee varies, but is a good general starting point for discussion and negotiation.
The concept of the financing fee around purchase order and inventory financing is critical as it relates to your gross margin, or overall profitability on your transactions. If you are in a low margin, slow turnover business the financing fee around a p.o and inventory financing scenario can eat away significantly at your overall profitability. Quite frankly the inventory and p.o. financing firm might deem your overall ability to complete the transaction as not making sense for all parties – there is no reason to just turn over sales and revenue if you do not have a solid profit outcome.
We all know the saying ‘timing is everything ‘, and how about another well worn but quite solid cliché – ‘the sale is not completed until your invoice is paid ‘. Those two well worn saying factor significantly into inventory and purchase order finance. The inventory finance firm expects to be paid when the product is delivered and your invoice is generated. In normal circumstances, if your firm is traditionally financed, you would borrow against your receivables and pay the inventory finance firm, which in some cases could be your bank. (If you had access to traditional finance). If your firm can’t repay the inventory and finance firm then it is wise, and in fact common, to arrange for factoring of your invoice. This is simply the sale and discounting of your invoice – with those funds you pay your supplier, your firm is now paid, and you have realized the actual cash profit on your sale. (Assuming you had those good profit margins we spoke of!)
By now you have probably figured out that a number of key players play a role in the inventory financing and purchase order financing cycle. Those key players are your firm, your customer, your supplier, and the inventory finance and P.O. finance firm. All are dependent on each other to perform properly in purchase order factoring , and in a timely fashion. Business owners and financial managers by now have probably realized the importance of validating your own customer, the purchaser or your product, as being credit worthy and agreed to your payment terms. If those don’t happen you clearly are at risk.
Despite the costs associated with inventory and purchase order financing in Canada there are a number of advantages – your company can grow significantly based upon access to large amounts of capital you might otherwise have not been able to raise or borrow .
And remember, inventory and purchase order finance is not debt on your balance sheet, you are simply monetizing inventory and p.o.’s to raise liquid capital.
So where do you obtain this type of financing. It’s a specialized form of business finance and we suggest to clients that they obtain the services of a successful, credible, and experienced business financing advisor in this area. That allows you to capitalize on opportunities for growth. That person can also assist and help you wade through the finance maze of basic issues, which might include the size of the facility you need, what info you need to provide to complete the financing, how long does it take to arrange the facility, as well as the costs associated with your transaction on a one of or ongoing basis.
When you are comfortable that his type of financing makes sense you should be able to complete your transaction within a number of weeks , assuming the proper level of transparency between you, your customer and your inventory finance and purchase order lender .