PURCHASE ORDER FINANCING AND INVENTORY FINANCING
Purchase Order Financing is a unique form of financing and source of capital and can greatly help borrowers who do not qualify for traditional bank working capital financing or need more financing or loans than are currently unavailable from banks or factors. Factoring does not help because the company needs cash to pay the supplier before the receivable or invoice is created for the factor to advance against. Factoring only works after the goods have been purchased, shipped into the country or trucked domestically, delivered to the end buyers and the invoice has been created. The big issue is where the company get the cash to buy the goods.
A growing company needs funds to finance the entire flow and not just part of the cycle. Purchase Order Financing provides funding to pay for 100% of the cost of the goods and funds the transactions through the receivable period so that the Borrower does not need any other funding for presold transactions. Purchase Order Financing is actually transactional venture capital and if available is a unique source of funding for growing companies or for cash strapped companies.
The choice for the borrower is either to obtain some form of equity financing, or to not take advantage of the business opportunity. Shortage of capital is one of the main issues facing medium sized or small companies especially ones that are growing. Banks like to make loans to large companies or to companies with substantial equity relative to the funding need.
Purchase order financing provides much needed capital to companies who have great business potential and valid orders but do not have the capital to grow the business. The Purchase Order Financing Company by financing the incremental inventory based only on Purchase Orders can provide liquidity to the borrower and take them out of the liquidity bind. For these reasons, banks having borrowers who need more funding than that which banks are willing to provide find the PO Finance companies as useful financing partners. Purchase Order Financing is transactional financing based on the merit of the transaction and not the balance sheet of the company. It is a form of transactional venture capital where the borrower can obtain almost unlimited funding without giving up any part of the equity.
Purchase Order Financing will finance borrowers who have little or no equity to support the amount of financing needed, a poor balance sheet and no audited financials or track record. Purchase Order Financing will pay the supplier of the goods and even provide working capital depending on the gross margin of the business.
The more capable Purchase Order Finance Companies will finance both export and import. In addition the more specialized Purchase Order Finance Companies will not only finance the purchase of the goods but also finance right through the receivable period and can be a one stop source of funding. The less capable PO Finance companies will only finance the purchase of the goods and rely on a factor or bank to take them out.
Purchase Order Financing works very well in work-out situations, where the borrower’s existing bank/s do not want to finance all the purchase of the inventory as it goes beyond the borrowing formula set by the bank.
Ashford Finance is one of the foremost Purchase Order, Trade Finance companies in the world. Please contact us with your trade finance needs for creative and prompt funding.
Inventory is often the ‘mother of all evil’. This is because a bloated overvalued inventory gives a false sense of financial security that is very nebulous. Valuation of stale inventory is very difficult and is often overvalued. Banks are very wary of financing inventory and will give it a valuation of 25% to 50% of cost.
From the lender’s point of view inventory financing is wrought with dangers. From the borrower’s point, they need to monetize the inventory to have access to sufficient liquidity. In situations where the inventory moves quickly and converts to receivables rapidly in the normal course of business, the inventory is of high liquidity value. Purchase Order financing where funding is obtained to purchase pre sold inventory for ultimate delivery to end buyers can be an excellent source of liquidity for the borrower facing liquidity traps and limited access to capital either to maximize their growth potential or to generate sufficient sales to cover fixed costs and generate incremental positive cash flow.
Typically an asset based lender will provide funding to a Borrower on some sort of a ‘formula’ such as 25% against fixed assets, 40% of inventory and 80% against receivables. The advance rate can vary depending on the borrower’s track record, industry etc.
Purchase Order (PO) Financing companies will finance 100% of the cost of inventory generally against specific purchase orders and if the margin is high enough will also finance some unsold inventory. The discipline of inventory management required by a PO Finance company is often also a forced discipline for borrowers to make sure that each purchase turns into a profit thereby ensuring an overall profitable operation and growth in equity.
Please contact Ashford Finance to resolve and monetize your inventory problems.
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