Despite the abundant liquidity in business financing, Purchase order finance remains an excellent tool for startups, growing companies with unexpected capital demands and those in a turnaround.
PO funders rapidly employ 100% of the transaction working capital and operate as a cash-flow creation tool for companies that produce, buy, assemble and sell products.
Often closely held businesses try to avoid bringing additional equity partners to solve short term cash-flow problems related to sales growth.
Businesses owned by private equity firms can also fund portfolio companies without committing more of their capital into a deal, leveraging off the PO financiers own balance sheet.
When funding local production and manufacturing, there is a need for a proven history of making the product, available capacity and the working capital to cover operating expenses during production processes. PO finance can also include the cost of materials, parts and direct labour to fulfil the order.
Is the business profitable or cash-flow neutral? Importantly the orders financed should represent incremental sales to the company (i.e. if the company lost the order, would it still be a going concern).
How many suppliers are involved in the transaction? The higher the number, the more due diligence it takes to verify the suppliers and control the raw materials/parts delivered to the client’s warehouse.
What’s the production cycle length? Weeks or a few months are much better suited for this type of lending. The longer the production cycle takes the more OpEx is required to produce goods increasing the performance risk or business failure.
What processes are performed during production? Fabrication, cutting, sewing, mixing, roasting, packaging, etc. are usually acceptable. Production involving tooling, moulding, milling, etc. in producing a finished product is more challenging and often requires some additional collateral to cover performance risk.
Two client examples funded with production Purchase order finance:
A 20-plus-year-old government contractor manufacturing infrastructure components sold to the State government and private transport contractors had to freeze its production due to cash-flow issues despite having $2.7 million in open, unfulfilled purchase orders.
A purchase order finance facility was structured to provide payments for materials from suppliers that are unable to deliver products on open credit. Additional capital was also needed to restart the supply chain allowing the company to fulfil the orders and continue production in their factory. The flexibility of the PO finance structure also enabled the company to utilise the funding to purchase finished goods from various overseas suppliers to fulfil specific large scale deliveries not assembled locally.
An exporter of boxed meats received a USD$4.3 million, multiple-year contract from a contractor in Japan. Export LCs get issued to the exporter (the client), but it had no availability under its credit line to purchase livestock from the farm gate.
A factoring provider suggested it utilise PO finance to fund the purchase of animals and production and fulfilment of the export contracts. Upon successful completion, the factor has agreed to factor selected listed corporate receivables increasing its existing credit facility as a result of improvement in the exporter’s balance sheet.
What is the common thread amongst the funded clients?
The substantial economic value injected into the borrower’s company that used Production purchase order finance. The stakeholders (other lenders, vendors and customers) involved in the transaction have benefited by leveraging the PO funders balance sheet.
Need help funding inventory or manufacturing operations? Ask Stak.
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Stak provides working capital to clients that sell to some of the largest buyers in Australia & overseas.