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THE PURCHASE ORDER FINANCE SOLUTION :
Purchase Order financing, as well as inventory financing, is two relatively new alternative financing solutions in the Canadian business environment. These two solutions provide additional flexibility when combined with traditional financing sources provided by your Canadian chartered bank or independent finance firm. Think of P O Financing as a short term finance options, allowing you to access capital to pay vendors and suppliers when you have a verifiable purchase order or contract.
WHAT IS PURCHASE ORDER FINANCING
It's a unique source of capital without giving up equity. In P O Finance its all about the transaction specifically, providing you with the liquidity to grow your company without taking on additional debt. New clients at 7 Park Avenue Financial have quickly found that their current banking and funding arrangements formula are well beyond what they need in immediate financing. Let’s dig in.
P O 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.
Traditional business and bank lending in Canada typically is unable to meet the SME need for financing of large purchase orders and contracts, and most clients we meet can't satisfy the bank requirements of collateral, strong financial statements, external guarantees, etc. Industry experts say that a significant percentage of all businesses requiring SME COMMERCIAL FINANCE solutions are constantly worrying about their cash flow, let alone the cash flowing of large new orders. Enter the P O FINANCE solution.
Who Uses Purchase Order Lending Facilities?
Growing and smaller and medium-sized businesses that have access to revenues otherwise not financeable utilize PO Finance - Your firm might not be able to generate the cash flow investment in a/r and inventory that comes with larger orders and contracts. The types of firms that use P O FINANCE are manufacturers, and distributors, as well as those firms that have an import/export business model. Typical clients looking for this type of creative financing have large bulges in incoming orders or some seasonality attached to their business.
Traditional business financing in the context of working capital and cash flow revolves of course around the traditional current assets of receivable and inventory. Even if your firm is well-financed and has a traditional bank line of operating credit you may have challenges in fulfilling large orders and contracts. This challenge becomes equally daunting when you don’t have traditional financing, so the ability to generate cash to fulfill larger orders and contracts becomes seemingly impossible. Utilizing P O Finance allows you to take on larger orders without the commitment of a debt financing/loan solution.
Purchase order financing/purchase order loans can provide you with the capital to fill those large orders and contracts, and, if properly put in place; can be very complimentary to your current financing.
As we have noted the concept of purchase order financing, aka ‘P.O. Financing ‘is a relatively speaking, new phenomenon in Canada.
HOW DOES P O FINANCING WORK?
So how do P O Loans work? Simply speaking financing is put in place to cover your material costs and direct labour costs, which are of course a significant part of your order or contract. We can safely say in many businesses that is 60-70% of the total order or contract based on most gross margins in any industry.
The purchase order funding process begins on your acceptance of an order from a verifiable customer. In the majority of these cases, clients of 7 PARK AVENUE FINANCIAL require financing because our client's supplier requires payment in advance. The working capital cycle has now kicked in! Most clients know that full payment from their client won't be received for probably another 60-90 days. Business owners of course do not want to lose the order and are typically unable to obtain Canadian chartered bank financing based on whatever their current financial position is.
The verified purchase order represents opportunity and value though - it simply requires accelerated funding. So in the P O FINANCE process your supplier is paid either by direct cash or in some cases a letter of credit with conditions related to your purchase order re-delivery, amount, pricing, etc. Key to P O Finance approval is your ability to present your company and management experience. It's safe to say the complexity of this type of financing is why it is more costly - there are a number of moving parts: timeline around the order and delivery, credit risk, etc.
Purchase order lenders distinguish themselves by being experts in the area of alternative finance. They have the expertise and ability to look at the entire order cycle, including the creditworthiness and legitimacy of your supplier/suppliers.
What Does The P O FINANCE Company Look For In Your Transaction? Applying For Purchase Order Financing
As we have mentioned P O FINANCE is a more expensive form of financing so your firm must be able to sustain the gross profit margins that satisfy your profits and the financing cost in the transaction. You should be able to provide the following at the commencement of your purchase order finance financing request:
Supplier Invoicing
Your firm's sample invoice to the customer
General business information such as financials, legal name of your company, etc
Your firm, therefore, now has the working capital to finance your production and fund purchase orders. What’s left of course is essentially the profit on your P.O. or contract.
While it sounds relatively simple and easy we would point out some key critical issues that will allow the Canadian business owner and financial manager to determine if his or her firm qualifies for such financing. We can first of all say there has to be sufficient proof that your purchase order or contract is with a valid, creditworthy party. Naturally, if there is any doubt that your order might not get paid, or that the customer is not creditworthy that precludes the successful completion of any purchase order financing.
You should also not view the purchase order financing as a long term financing solution, it is not that. The funds are generally repaid immediately when you have completed your order/contract.
PURCHASE ORDER FINANCING VS. FACTORING
There are also some technical issues that need to be addressed if you have secured financing arrangements in place already. For example, if your firm has a bank line of credit they would be required to acknowledge the security that is taken in the Purchase order and resulting receivables that you create out of that order.
In our own experience Purchase order financing frankly works best when there is not a secured lender in place already, but that’s just our firm’s observation. Additionally, on occasion, certain other collateral or personal guarantees might be required. We would hasten to add that if you have already provided guarantees to the bank or other firms it would seem logical that you would provide them on the purchase order financing, which is somewhat of a riskier transaction for the lender.
Most clients at 7 Park Avenue Financial realize that purchase order finance companies are really providing a one-stop funding that takes you all the way from the order to the collection of the receivable. Note that P O loans that allow you to fund purchase orders is often very well received by suppliers who know they are going to be paid. Also government purchase order financing is also available.
Another very critical point is the whole issue of gross margin. The issues are that you need good gross margins to complete purchase order financing! A firm that is in low margin very commodity-oriented business is not a strong candidate for P.O. Financing, because the combination of cost of goods, labour, overhead costs, and financing costs of the financing leaves very little for the business owner. So categorically good gross margins make a much better P.O. Financing deal. Costs in P O FINANCE tend to be different for each transaction based on a number of factors including the cost of capital, time to complete the order, etc. International purchase order financing may also bring new complexities to your transaction regarding sovereign risk.
So for the business owner and financial manager looking at purchase order financing lenders it is important to weigh the costs and benefits of your transaction. In many cases larger P O 's and contracts are a key part of company growth plans so they are prepared to forgo some profit to achieve sales goals. In many cases traditional financing simply can't react quickly enough to satisfy the timelines of your order. So alternative finance solutions such as P O Finance, Inventory Financing and A/R financing solve your financing need.. quickly.
So why has this type of financing become popular – that’s fairly easy to understand. First of all the current Canadian business financing environment is challenging – therefore any alternative financing vehicle has a strong chance of being embraced and becoming more popular. After that it simply makes sense that p.o. financing can be very successful for your firm if it gives your company working capital you didn’t have, , it allows you to grow and profit at greater levels, and overall improves your competitive positioning within your industry.
We strongly recommend that if you consider Purchase order financing that you enlist the services of a trusted, credible and experienced Canadian Business Financing Advisor with a track record of business finance success who can assist in maximizing your cash flow and working capital with this unique innovative type of financing.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
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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.
Stan Prokop
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