Inventory and Purchase order financing are two relatively unknown financing strategies for Canadian business owners and financial managers. The ability to complete and 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.
Clients 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 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 simple mean that if you were getting nothing or say 25-30% on you 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
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 you firm have received a large domestic or international order but does not have the working capital ability to properly product 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 product the order, after you have produced it you have to bill the order, and then of coruse 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 product for your customer. When you bill you 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 amount 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.
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 experience and credible advisor in this area of Canadian business.