Blog articles discussing factoring companies, factoring loans, invoice factoring and all things related.
Many companies out there provide purchase order financing and each have their desired “sweet spot” when considering funding requests. While most companies will entertain your purchase order if you are receiving traditional order requests from tradition customers, few will grant credit on anything deviating front the norm. When I say traditional orders I mean orders taken from retail or wholesale customers. Traditional customers meaning customers with credit that is easily verifiable with a strong payment and financial history.
So what if your request isn’t “the norm?” We recently had such a request and found them the funding they needed.
Here’s the scenario: our client operated as a sandwich distributor supplying customers with home style sandwiches for schools and other municipalities. His business was growing and he needed purchase order financing to fill the orders. Easy enough right? Wrong. Because his products are perishable items, only one purchase order finance company would consider the request. You see, our client personally would go out, take an inventory of the sandwich supply and write down how much inventory had to be replaced. He would then take that purchase order that he created and submit it to his supplier to fulfill.
There are two issues for most lenders here: 1) perishable items, 2) the client creates his own purchase orders. Why are these an issue? Well, for a couple reasons. Firstly, most lenders are wary of lending to companies dealing with fresh perishable items largely due to spoilage. The spoilage risk could reduce the amount owed and thus create a risk to the lender’s exposure. Secondly, the client is creating his own purchase orders and receiving financing based on those orders. The lender is exposed here as the client could theoretically fabricate the amount of the purchase orders upward to assist the company’s cash flow. The lender would then advance on the amount of the purchase order and unbeknownst to them, be in an involuntary over advance.
So needless to say, most purchase order funding companies we deal with were not open to working with our client. Except one. You see, with a few more questions asked, we were able to get one of our lender’s comfortable. Regarding the sandwich spoilage, this is running at about 3% which is a nominal amount and well below the standard reserve taken in the formula advance. On the purchase order issue, our client receives a verification from the supplier on each purchase order and the sandwiches are closely monitored in a tracking system. Any excess sandwiches would not fit the amount being shown as used in the customer’s coolers. Additionally, our client’s warehouse is continually monitored by the USDA for quality and cleanliness reviews.
All this considered, the purchase order financing company was comfortable and granted the funding needed. Above and beyond the sandwiches, our client also distributes supplement drinks. This product line is a larger percent of the business and will be included in the collateral pool for the line of credit. All in the client needed $250,000 in immediate purchase order financing and has a backlog which should increase this substantially starting next month.
If your business could benefit from a lender that listens, we would like to speak to you.
To your success!
Patrick Zazueta | Founder
Huntington Coast Capital, Inc.