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| PURCHASE ORDER FINANCING AND
INVENTORY FINANCING |
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Purchase
Order Financing is a unique form of
financing and source of capital which can really help
borrowers that 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 will
the company get the cash to buy the goods. |
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A growing
company needs funds to fund the whole flow and
not only 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 not to take
advantage of the business opportunity. Shortage
of capital is one of the main issues facing
medium sized or small companies specially ones
that are growing. Banks like to make loans to
large companies or to companies with substantial
equity relative to the funding need. |
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Purchase order financing
provides much needed capital to Companies
who have great business potential, have valid
orders but 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 incremental
liquidity to the borrower and take them out of
the liquidity bind. For these reasons, banks
having borrowers who need more funding than what
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. |
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Purchase Order
Financing will finance borrowers that have
little or no equity to support the amount of
financing needed, poor balance sheet, 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 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. |
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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. The PO Financing
company by financing the incremental inventory
based only on Purchase Orders can provide
incremental liquidity to the borrower and take
them out of the liquidity bind. For these
reasons, banks having borrowers who need more
funding than what banks are willing to provide
find the PO Finance companies as useful
financing partners.
Ashford 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. |
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Inventory Financing |
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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.
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From lender’s point of view inventory financing
is wrought with dangers. From Borrower’s point,
they need to monetize the inventory to have
access to sufficient liquidity. In situations
where the inventory moves quickly and becomes
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 good
source of liquidity for the borrower facing
liquidity traps where it does not have access to
enough capital either to maximize its growth
potential or does not have enough funding 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. |
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Purchase Order 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 your
inventory problems and to monetize them. |
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