Inventory and Purchase order financing in Canada are two relatively unknown financing strategies for Canadian business owners and financial managers. The ability to complete an inventory and/or purchase order financing strategy allows you to produce more, distribute more effectively and in a cost-efficient manner, and also to buy smarter.
The ability of your firm to both buy smarter with additional capital, plus maintain the right level of inventories is a key factor in competitive success in your industry. INVENTORY AND PO FINANCING can be a stand-alone finance solution, or it can potentially be complementary to your current business financing.
The inability to secure supplier credit in the capacity your company needs is a constant challenge for many business owners. Vendors may often impose payment terms and conditions that simply can't be met and ultimately affect your ability to grow the business and profits. Sudden growth opportunities must be capitalized on or they go to your competitors.
Business owners and financial managers are required to determine what is their optimal financing for their inventory or client orders. Companies with solid P O 's from reputable clients are excellent candidates for PO Finance, while a general manufacturer who desires to build inventory levels on a constant basis should investigate the inventory finance solution.
KEY POINT - The least expensive form of financing is Supplier Financing - so the ability to get extended terms from valued suppliers is in fact the optimal solution, but often not available, necessitating the use of a funding company.
The ability to accept large new contracts as well as the ability of fulfillment to meet your client needs is the true benefit of INVENTORY/PO Finance and the services of inventory financing companies in Canada. Many firms that utilize this method of financing also have the ability to expand into the U.S. or other international markets, opening up massive opportunities for growth.
The ability to have access to capital and enter into new or foreign markets can be a game change to sales and profit growth for any business, Having financing in place to meet purchase order demands allows your firm to negotiate the best pricing and discounts available - in effect, you are ' pre-approved!
International purchase order finance can also benefit from the assistance of the Canadian government which has a mandate via EDC to supplement financing needs for Canadian exporters. A variety of industries can utilize this method of CANADIAN BUSINESS FINANCING and the ultimate solution is always tailor-made to your specific product and customer needs via a capable financing company partner.
P O Finance ensures that the financing in place is properly aligned with your payment terms to both your vendor as well as receipt of payment from your client. Numerous currency exchange issues are also dealt with within the PO order
It is important to understand both the similarities and differences in P O Finance as well as inventory finance solutions. Both function differently.
WHAT IS P O FINANCING?
Purchase order finance is directly related to a specific purchase order or contract and in essence, covers the goods directly related to the purchase order/contract. As a general rule only finished goods are financed under the P O funding mechanism, so no changes or modifications are allowed for the product. The entire process allows your supplier and vendor to be paid.
As a general rule purchase order financing is not for building inventory levels so a general manufacturing firm looking to increase inventory levels via financing would not look to PO Finance.
Purchase Orders are closed when product is shipped and accepted by the end client and invoicing creating a receivable occurs. At that point the a/r directly related to the order if financing in the normal course of business, depending on how the borrower funds receivables via a bank or financing companies in Canada.
Inventory Financing & Inventory Companies
Companies looking to leverage capital for build-up of inventories look to a sole inventory finance facility. The facility can be ' stand-alone ' or as part of a business line of credit or asset based lending facility. Therefore the inventories being financed are not specifically related to any one specific client. It is really a working capital solution for that critical part of your current assets on the balance sheet - inventory!
Commercial finance lenders or a full service factoring company may choose to visit the borrower on a regular basis to ensure inventory is adequately maintained - companies should be capable of producing inventory reports and ensuring they have proper inventory accounting in place. For larger deals a lender might insist on a PERPETUAL INVENTORY SYSTEM being in place. Inventory can be a major portion of a company's cost of goods sold. ( COGS ). The ability to access capital to fund inventories is challenging and the ability to turn inventories is key to long term financial success.
One of the largest costs when it comes to operating a business in Canada is being able to purchase inventory. However, purchasing quick-turnaround inventory can be difficult for a new business owner. This is where inventory loans come into play.
Companies that tend to look for inventory solutions are distributors and manufacturers. Unlike our P O Financing example inventory can be in various forms, which typically are raw materials, work that is in progress, and of course finished goods.
In the P O finance process credit adjudication is made on your firm and as well who you client and supplier are key aspects of the final approval to finance decision. When it comes to inventory is all about the valuation of your inventory vis a vis potential liquidation values in event of default from the bank or non-bank commercial lender.
As a general guideline a purchase order financing company will cover approximately 75% of the order from your client. Financing is directly related to the payment to your supplier. For most firms this will typically cover the majority of costs related to your order and it assumes that your company has good gross margins. P O Finance doesn't work well with low margin transactions as the transaction will not cover the additional financing costs. So have a gross margin in the 25-30% range is very desirable for this method of financing.
Companies that require general inventory financing for their ongoing business can get anywhere up to 70% of the agreed upon liquidation values of the inventory. In many cases some sort of third party appraisal might be required, but in general many inventory financiers are very familiar with inventory values and have significant expertise in certain industries. As a manufacturer your goal is to maximize on the funding value of the inventory.
Clients of 7 PARK AVENUE FINANCIAL ask us how they can finance inventory more effectively in their Canadian operations. Inventory financing in a traditional manner had your firm acquiring an inventory facility as part of your Canadian bank operating facility. If you are successful in obtaining such a facility one of the challenges is simply that this level of inventory margining is not sufficient to meet your needs. The very simple reason for this is that the traditional chartered bank does not necessarily understand inventory lending, which requires a unique focus and specialized knowledge of a wide variety of industries.
The best solution for an inventory financing facility in Canada is actually a dual solution.
You should finance inventory separately outside of your bank arrangement – this will give you additional margining with a finance partner who understands your industry and inventory financing needs. The other solution is to combine the inventory financing within a non-bank asset based lending facility that provides you with maximum margining on both inventory and receivables. Your facility operates just like a bank line, but you are receiving maximum liquidity via higher margining of both inventory and receivables.
By higher margining we simply mean that if you were getting nothing or say 25-30% on your inventory credit line you will probably be in a position to now receive between 40-80%. What does that mean? Of course, it signifies greater cash flow and working capital for the Canadian business owner.
A ‘true‘ inventory financing facility will now include margining against all three types of inventory:
- Raw materials
- Work in Progress
- Finished Goods
We caution you not to enter into an inventory financing facility whereby your inventory must be stored at a third party warehouse in order to receive financing consideration. We do not recommend clients pursue this type of facility.
A solid inventory financing facility will allow you to grow sales and increase your working capital base.
With respect to purchase order financing this is clearly another financing strategy that has emerged as growing and more popular in the Canadian business environment. It is not difficult to understand its popularity. Consider your firm has received a large domestic or international order but does not have the working capital ability to properly produce and deliver that order.
More often than not that is simply because of the cash flow cycle – your order is large, you require inventory and equipment to produce the order, after you have produced it you have to bill the order, and then, of course, you wait to collect your receivable. That whole process can easily take 60-120 days in any firm.
With purchase order financing your supplier is paid directly by the P.O. financier. You then receive materials and generate products for your customer. When you bill your customer that invoice must be discounted immediately in order that the purchase order financing firm gets paid. P.O. financing works best when you have a small number of suppliers, and you have good gross margins that can sustain the additional cost of financing the purchase order and then the receivable. It allows you to grow your business and stay significantly more competitive.
Almost any size or type of firm is a candidate for purchase order finance solutions, even less established or smaller firms - as a general rule in order to qualify for financing of inventory a firm should be established and have reasonable financials.
Many inventory finance needs can be accommodated as part of a business line of credit that finances both receivables and inventory as part of the facility. These solutions can come from factoring companies or asset based lending companies. The process of purchasing more inventory via an asset-based line of credit frees up capital for additional purchases. As your receivables and inventory turn you purchase additional products to sell. Firms that have unsecured credit lines have the ability to purchase goods in the normal course of their business.
WHY DOES INVENTORY FINANCE & PO FINANCE WORK?
Alternative lending solutions that we have described work for business for some very fundamental reasons :
Alternative finance is generally much easier to get than traditional bank financing, so solutions such as a receivables loan or non-bank credit line are very accessible
Inventory, a/r, and P O Financing ability grow almost automatically as your business opportunities grow
The ability to leverage asset financing often not available in traditional finance increases cash flow and working capital growth to fund day to day operations and growth opportunities
Business Funding via Purchase order financing, as well as inventory financing in Canada, are ‘boutique‘ in nature. We strongly recommend you investigate the benefits of theses financing strategies by talking to an experienced and credible advisor in this area of Canadian business.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
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