The mystery relationship between factors and purchase order financiers

The mystery relationship between factors and purchase order financiers
Invoice Factoring working in Tandem with Purchase Order Finance

Even seasoned veterans of purchase order financing can still be surprised by the misconception by some lenders and factors as to what purchase order financing is.

Properly characterised as “structured inventory financing”, this insight will discuss how entrepreneurial lenders can lift the veil on the misconceptions of when to lean on a purchase order financing specialist.

When a prospect or client approach a lender with an inventory financing request, it is common for the lender to investigate:

  • The type and make-up of the inventory (i.e. finished goods, raw materials, work in process, commodity etc.)
  • The amount of inventory exposure in dollars and as a percentage of the overall collateral pool (accounts receivable, machinery and equipment, real estate, or other “boot” collateral)
  • The appraised value of the inventory or end sales value minus landed costs
  • Seasonality of the business and industry cycle
  • Whether the inventory (or a portion of it) is presold.

Lenders can often assess the situation and rationalise adjusting advance rates to accommodate what may be a temporary or planned “over advance.”

The quandary for a lender or factoring company is what to do when the request is unplanned (the lender is over-advanced, but does not know it yet) or the request is above the “approved” exposure level.

Factors, trade (traditional) financiers and lenders often find themselves in this position when a client’s business is in rapid growth or turnaround. They often lack liquidity or capital in the business to support cumulative inventory purchases.

The predicament for a lender will come when they hear statements from their borrower such as:

“I have sales orders, ranging or pipeline fill that I can’t get out the door.”

“I just received a huge order, and I need to negotiate payments with my supplier to get it shipped.”

“I have an export order or contract, but need to buy raw materials or components to complete the product and deliver on the sale.”

“My sales forecast from customers are exceeding last year and I need to start growing inventory now. My suppliers won’t go into manufacture without some form of payment guarantee or deposit because I have hit the ceiling on my open account terms .”

“I am expanding overseas, and I need a lender who understands cross-border lending.”

Most times, lenders will deny its borrower’s request sighting lack of understanding of the drivers or complexities associated with their borrower’s financing need.

Worse yet, a lender may advise the borrower they could support their financing request if they pledged additional outside collateral. This is not often preferred, or possible for a borrower in rapid growth or turnaround mode and new facilities may still get mismatched to cash conversion cycles.

Surprisingly, lenders and factors often forego recommending a purchase order financier based on the following:

“My borrower does not get official purchase orders from their end buyers at the time they need to arrange their inventory purchases.”

“The client doesn’t need a letter of credit issued to its supplier and that is all that purchase order financing really does.”

“The client is a local manufacturer needing production financing for raw materials, work in process, and labour costs. Purchase order financing won’t work in this situation.”

“The client buys the product in China and ships to customers in a country other than Australia. I think purchase order financiers won’t finance this scenario.”

Purchase order or production financing is a form of inventory financing. It is not traditional trade finance. It can be a solution for domestic factories that manufacture goods in their own facility to meet incremental sales growth.

Here are likely answers a purchase order financier can offer to fund inventory and manufacturing facilities:

While “official” purchase orders are preferred, it is very common for a borrower to have a customer “forecast” that precedes an EDI-based order just prior to when the end customer requires delivery that can be funded.

Modern purchase order financiers can also provide production or work-in-process funding which is probably the highest form of a structured inventory financing solution. It is vital the client’s need be for “incremental” inventory rather than funding of the manufacturers OpEx (operating expenses) or baseline orders (non-presold stock). In some cases, if the collateral is sufficient, term loan enhancers can be provided for some OpEx related to production.

Purchase order financiers are encountering more and more cross-border situations as Australian-based companies are looking to expand the distribution of their products into overseas markets.

The providers experience in global trade, logistics, customs issues, and working in tandem, when required, with specialists in accounts receivable financing or payments under letters of credit is critical when working with cross-border transactions. Willingness to structure facilities to work alongside an existing Lender’s domestic financing program should be sought after.

Providers such as Stak fund all pre-shipment aspects leaving receivables to be financed by the factor.

Factors, asset-based lenders and even banks should feel comfortable calling up a purchase order financing specialist such as Stak that can work in tandem with them to offer a solution, solving in tandem to deliver intricate inventory financing requirements to its borrower.

Need help funding inventory or manufacturing operations? Ask Stak.

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We regularly share our thoughts on trade finance, lending, procurement, logistics, and international trading.

Stak provides working capital to clients that sell to some of the largest buyers in Australia & overseas.

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