For many Canadian business owners growing sales and profits is not always the biggest challenge, it’s locating business financing in Canada a can satisfy inventory and purchase order requirements from their customers.
When traditional financing doesn’t necessarily satisfy your firm’s ability maintain thee right levels of inventory, and satisfy those large new customer purchase orders and contracts than an inventory and P.O. Financing facility might just be the solution.
Clients we speak to like the concept but always ask – ‘How does this type of financing facility work?’ . We can use a basic example that reflects the power of this unique financing tool. Let’s assume you have an order, contract, purchase order, etc from a valued new or existing client. The challenge, mainly due to the size and or timing of the order, is of course how you purchase and maintain the level of inventory to satisfy those client needs.
When you use an inventory or purchase order financing facility your vendors or suppliers are paid directly by the inventory financier. Generally speaking up to 75% of the value of your order can be financed via a payment to the supplier. That 75% number is key, because in the example we are using I reflects that you probably have at lease a 25% gross margin on the sale of your products. Generally speaking at least that amount of margin is required to efficiently and properly complete an inventory or financing transaction. That is because the remaining 25% acts as both a buffer to the lender, as well as it allows some of your margin to be paid out as a financing fee of course , for the business risk and cost to finance your inventory/project .
Generally inventory finance lenders prefer to be paid as soon as you ship and create a receivable for your goods and services. That necessitates ensuring that you have a receivable financing facility set up with either you bank or a receivable financing/discounting firm.
What is the key benefit of such an inventory or p.o. financing facility? It is simply to remove a huge part of what finance people call the conversion cycle. If you don’t know the term we are very sure you know ‘the feeling ‘. It is the feeling of knowing that in a normal environment, if you were fully financed, that you would be waiting anywhere from 60-90 days, (sometimes more, sometimes less) for a dollar of your services to move from time of receipt of purchase order, your purchasing the inventory, your finishing the inventory, and then billing and waiting another 30-60 days for payment. The inventory finance facility helps to significantly lesson that amount of time as you can imagine.
That is why growth and the ability to carry inventory, (and receivables) are often the biggest challenges to Canadian business owners who are focusing on increased sales and profits.
Inventory and purchase order financing focuses on the transaction, and focuses less on the fundamentals of your company. Naturally the facility works best when you can validate that your firm has strong management, good profit potential in your orders, and the ability to successfully deliver and get paid to clients who are generally known or credit worthy. Financing for clients who sell to the ‘big box ‘stores are commonplace in inventory and P.O. Financing – think ‘Wal-Mart’.
Remember also that the financing facility we describe above delivers on working capital and cash flow, but is not a term loan per se, so no additional debt is on your balance sheet – you are simply monetizing your inventory, receivables, and purchase orders in order to complete our full ‘ conversion cycle’ of order inventory Receivables Cash .
When you can duplicate that process over and over and shorten the total time outstanding you have successfully utilized one of the most unique financing alternatives for Canadian business.
Speak to a trusted, credible and experienced advisor in this area if you have an inventory financing need. Ensure you understand timing, costs, how the facility works and whats required. You might find that it’s the perfect solution for growth and profits.