For entrepreneurs and business owners, supply chains have had a transformative effect upending traditional inventory models and creating opportunities for many lenders.
Still, factors, in particular, need to find new ways to support companies during critical periods of growth. Unexpected extraordinary amounts of capital injected to fulfil sales orders can generate significant benefits for the factor and client, but how does the factor shift the risk without moving outside of their specialisation?
Stak has a trade finance team dedicated solely to purchase order financing. The product is designed to work in tandem with invoice factoring; PO financing focuses on providing alternative inventory solutions to cash-constrained businesses. Factors and business owners leverage Stak’s balance sheet to fund any import or export pre-shipment costs that relate to large sales orders and contracts.
No business today — importer, exporter, wholesaler, assembler or light manufacturer — is immune to the working capital gaps created when an unexpected large sales opportunity arises. Challenges like seasonality, rapid growth and under capitalisation are common hurdles that every business will inevitably face.
PO funding to deliver on large retail sales
PO financing helps businesses leverage funding to capture sales otherwise declined due to unfavourable supplier or buyer trade terms or liquidity issues.
Factoring providers are slowing realising the expertise and risk management components that can be tapped into by partnering with a PO Financier. Upfront inventory audits and everything from quality control and product sourcing to logistics and delivery — can also be leveraged to fund and finance purchase orders.
Factors take comfort in knowing that the PO funder has removed delivery and performance risk from the transaction while presenting fresh factorable receivables that would otherwise not exist. The alternative is for the factor to venture into uncharted waters and deploy capital outside of their traditional comfort zone.
These scenarios play out every day with companies looking to secure additional short-term inventory financing to support a once-in-a-lifetime order while leaning on their senior lender to advance further funds. It can result in the threat of a client sourcing alternative financing and loss of revenue or stacking additional mismatched debt outside of the factors/lenders control.
Factors recommending a purchase order finance solution
Clients that are hustling to fulfil orders put extreme pressure on cash flow, so they naturally seek additional financing with their existing factor. It’s not uncommon that an already multi-million dollar facility is in place and the factor may have already approved a temporary over advance, but at what risk? Are controls in place to ensure over advance funds go towards finished inventory or productions elements that will result in new assets? Is the client taking funds for OpEx?
To add risk, the overseas supplier that had, up until recently, granted open terms to the client is unwilling to extend terms and requires pre-payment for goods before shipping. Commonly, this is due to unpaid bills with new funds applied to old debts with further costs, duties and logistics bills needing auditing to ensure goods get to buyers.
The company and factor face a problem. But, the existing factor, even though it could extend credit itself, recognises the value of a client delivering on large seasonal inventory and encouraged the client to explore PO financing as a solution. This will ensure adequate liquidity and transaction management is provided to deliver on sales orders.
The factor was not forced to increase into an over advance position and took advantage of the PO financier generating incremental cash flow and verified high quality new factorable debts.
PO financing has also become beneficial for companies needing production financing or work-in-process financing.
The often complex production financing requirements commonly involves a transaction structure of purchases from several component suppliers as well as funding the fabrication of the final products by a contract manufacturer or the within the client’s factory itself.
Working closely with the factor, Stak can establish a production financing facility that works alongside an existing factoring facility.
Lending in this pre-shipment environment requires flexibility, tolerance and a level of expertise that stretches far beyond advancing on an invoice. Lenders need the necessary internal infrastructure, expertise and transaction management to address these financing challenges.
Pre-invoice or “pre-shipment” advances by factors if executed at all, are often done ad-hoc, piecemeal or as a unique reluctant advance for select clients and is rarely offered as a formal service.
Factors are superior at checking and analysing end customer credit, concentration risk, verifying and collecting receivables.
Knitting together the expertise of an experienced and agile PO funder can help to strengthen a client and factors relationship and maintain a secure and less risky environment for all involved.