Cost of goods is the single biggest expense for a lot of companies. This cost grows as your business gains new customers. Your ability to deliver will keep those customers coming back. Failing to fulfill an order can result in losing a customer forever!
The challenge we see in consulting with our clients is a lack of capital to meet growth needs. Most all purchase order and supply chain finance companies require “skin in the game” from the borrower. This typically translates to the borrower bringing in 20-30% of the cost of goods to fulfill the orders. Depending on how big the order is, this can be challenging. For example, you receive a $500,000 order from a customer that requires a 30% investment contribution from the lender. This equals a $150,000 cash requirement from the borrower to place toward the order. Most all companies we deal with do not have the “equity” for the transaction and this is the very reason they are in search of financing.
What are the key components to receiving 100% financing for your purchase orders?
- Strong supplier relations. It is easier when the borrower has a verifiable transaction history of successful delivery with the supplier. The greatest chance of approval is when the finance company is being asked to take the borrower’s current production from “A to B” versus a first time order with a new supplier that has never been used before. There is “execution risk” inherent in this type of financing and the funding source needs to be comfortable with the supplier’s capabilities.
- Credit worthy customers. It is essential that the customer presenting the purchase order has adequate credit strength relative to the size of the order being placed. For example, a small mom-and-pop shop placing an order for $1,000,000 of any product would have a harder time getting approved than Walmart or Target.
- Ability to direct customer payments to the lender. Collection of the invoice to the customer needs to be routed through the lender’s bank account. This is the primary source of repayment. Once the customer pays, the lender’s line is paid down, followed by finance fees, with the balance forwarded to the client. This balance represents the client’s profit in the transaction.
- Direct payment to the supplier. Similar to the lender requiring payment directly from the customer, the lender also needs to pay the supplier direct. Payments to intermediaries, brokers, or anyone aside from the actual supplier is prohibited. The lender needs to ensure that the supplier is paid for the goods they are producing. Payment to any other source leaves the lender at risk.
- Established borrowing entity. We are occassionally approached with purchase order or supply chain financing requests (sometimes in the millions of dollars) from newly formed entities with no assets and limited, if any, transaction history. These are naturally challenging. The exception would be if this newly formed entity was owned by a solid team of owners with previous experience in the same industry as the newly formed endeavor. Even still, the owners in these scenarios would need to have a strong outside net worth and secondary source(s) of collateral to pledge should the transaction go south and the lender need to be made whole.
- Personal guarantees required. When there is resistence to personal guarantees, there is resistence from the lender to approve the line of credit. When borrowers request the removal of a personal guarantee they are essentially saying, “we need money to fulfill orders, grow our company and profit from that growth, but we are not willing to promise to pay you back. If you lose your money, too bad.” Well, they don’t actually say it in these terms, but they might as well because that is what the lender is hearing. It is required that the borrower(s) stand behind the proposition they are asking the lender to finance.
About Huntington Coast Capital.
Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.
We consult on a wide range of funding options for business owners throughout the United States in the following areas:
- Supply chain financing
- Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
- Lines of credit for working capital needs
- Term loans for marketing, hiring staff and general expansion needs
- Factoring services for accounts receivable financing that also provides for back office credit and collection functions
- Purchase order financing
- Asset based loans
- Business acquisition financing
- Inventory financing
- Private commercial real estate bridge loans
- SBA loans for business and real estate needs
Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. Purchase Order Financing can cover 100% of your supplier cost!