Trade finance for startups: Using the lenders money to profit

Trade finance for startups: Using the lenders money to profit

Image credit: Michele Marconi

Arguably the hardest time to source working capital is in the first two years of trading.

Growing a new business exhausts profits with wages, advertising and fixed costs. Compounding the issue is the need to show profitability if you’re seeking to raise capital from banks to expand.

Traditional lenders are more concerned with your past trading history rather than your opportunities

Banks assess your fixed assets (real estate) rather than your floating assets such as purchase orders, contracts and invoicing. These fluid assets can be used to raise capital against, regardless of your growth cycle.

Lenders that provide finance against purchase orders or receivables are sometimes called asset-based lenders or transactional lenders. They consider each one of these an asset that is self liquidating I.E it pays itself off by the end buyer/customer.

When the lender provides funding against an invoice or a purchase order it’s repaid by the customer.

This is where your customers credit becomes important.

What are transactional lenders looking for?

The strength of the transaction is at the core of the funding decisions;

With purchase order financing, the end buyer’s credit is critical to success. If you’re raising funds against invoices, then the buyer/customer credit is the considered along with the concentration or spread of customers you are selling to.

Lenders are more concerned with your supply chain, raising purchase orders and invoices to delivering on a product or service that won’t impact the chances of the funding being repaid (acceptance risk or non-payment/insolvency).

Key points before approaching the lender:

  • Do you obtain purchase orders?
  • Do you raise invoices to credit worthy customers?
  • Do you obtain proof of delivery or service?

Your paper work needs to be very tight in order to qualify for funding. If you’re seeking funds to pay a supplier, paperwork needs to be perfect and your customer credit needs to be blue chip.

How much could you sell if you knew funding was unlimited?

Transactional lenders are limited in Australia (Such as Stak) however, finding a lender that understands asset-based lending could be your pathway to early profits.

Let’s consider this scenario:

You’ve just started trading specifically because you have an opportunity to supply a large retail chain with product/s.

You’re so excited to secure the order that you provide assurances that you can deliver the product on time and win the contract. You’re advised that little to no deposit will be advanced to secure the order and to increase your stress levels, they demand a ninety (90) day payment term.

You’re then stuck with this likely supply issue:

  • Day 1 – Receive the order
  • Day 14 – Place the order with your supplier (pay your deposit)
  • Day 28 – Goods or ready to be shipped (*pay the balance before shipping)
  • Day 49 – Goods arrive
  • Day 63 – Goods received in full into customer/s
  • Day 153 – Customer/s pay for order

This typical timeline can place an enormous amount of pressure on working capital.

You’ve send money for the deposit on day 14 and poured the rest of your cash flow into funding the balance at day *28, leaving another 125 days (or just over 4 months) until you see a payment from the customer.

Using a trade financing provider, you could have utilised their funds at day 28 and had the funding repaid by your customer on day 154, giving you a solid four (4) months of additional capital to fund more orders, wages or expenses.

The main attraction to this type of funding:

  • No repayment required along the way
  • Purchase order sizes are typically unlimited
  • Not based on your trading history or property assets
  • Ability to say “yes” to large orders without using your own funds
  • Financier manages the entire process

Working with a lender that provides funding based on non-traditional assets can not only help increase growth, but also provide an exceptional return on investment for each order given it’s not your own cash.

See what the alternative is all about.

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We regularly share our thoughts on trade finance, lending, company culture, product strategy and design.

Stak works with clients that sell to some of the largest buyers in Australia & overseas.

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Purchase order finance: Transactional trade financing and its risks

Purchase order finance: Transactional trade financing and its risks