This is a good novelty/worse situation in its classic best form. Your company has the ability to receive orders or contracts, but you are questioned with restrictions or unavailability of stocks and PO financing (purchase order). Financing your business on the basis of assets such as inventory and orders in the near future has never been a greater challenge in Canada.
When we talk to clients we advise there is no single method that seems to handle all inventory and P About financial challenges. But the good news is that through various effective business financing tools you can hire you are able to generate working capital and cash flows from these two asset categories. Let’s explore some real world strategies that make sense for clients.
The source of the problem is simply that you have orders and contracts, but these will potentially be lost to a competitor. The conventional wisdom is that you go to the bank and ask for financing to support inventory and purchase orders. As you may have already experienced, we are not great believers in conventional wisdom in this matter!
However, using a conventional source of financing purchase orders allows you to purchase a product and get payment from your suppliers, thus facilitating the ability to deliver products to your customers.
One of the main benefits that many customers do not realize that financing inventory and P O financing does not necessarily require a company to have a long or strong credit history, the emphasis on structuring the transaction is around the inventory is financing and the overall creditworthiness of the customer who will pay for himself or the inventory or P O financing the company.
The whole process is quite simple and easy to understand when it comes to an effective combination of transactions. Upon receipt of a confirmed purchase order, your supplier is paid in cash or letter of credit. Your company naturally completes the last shipment of the product, which usually involves extra time on your company’s side. When shipping and, of course, payment from the customer, the transaction is actually settled. In a truly pure financing scenario, P O funder is paid immediately after the product invoice is issued. This makes it easier for your company to sell your claim through a factoring transaction as soon as you generate an invoice.
This type of financing always has certain limitations – that’s why at an early stage of the transaction we look for the possibility of re-launching the product on the market in case of a transactional risk. Of course, as we have found out, your customer’s overall creditworthiness is crucial, his receipt of goods and payment closes the transaction as a result.
Financing inventories and POs is generally more expensive than traditional financing, mainly due to the significant transaction risk taken by the lender. Therefore, we strongly recommend that your company has a solid gross margin of 25% to cover the associated post-financing costs, stock financing transactions, which also factors in the time needed to obtain payment by the customer, as it usually adds 30-60 days for the entire transaction cycle.
If there is one great tip of ‘secrecy’ that we share with customers simply that the best way to provide financing in the way we have described is to consider an asset-based credit line. Combined with a loan that will finance purchase orders, this is the ultimate working capital tool that will allow you to quickly and significantly expand your business. This type of credit is usually non-bank credit and is offered by independent financial companies.
Talk to a trusted, reliable and experienced tempest finance who will help you combine working capital and cash flow solutions that works!