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Understanding Specialized Financing Options
Many Canadian business owners and financial managers are not fully aware of the availability and benefits of business inventory and purchase order financing.
These types of financing are very 'niche' and are specialized areas of business financing in Canada.
The reality of these two financings is that they can be arranged individually, but quite often are sought by business owners as a combination, as they are inherently linked by their very nature.
That is to say that your firm receives a purchase order (P.O.) or contract, and as a result requires working capital and additional cash flow to buy the inventory required to fulfill that customer's needs.
The Cash Flow Trap That Kills Growing Businesses
Your biggest sale could become your biggest problem.
When customers place large orders, you celebrate – until reality hits. You need cash upfront for materials and labor, but payment comes later. Many profitable businesses fail at this exact moment.
Let the 7 Park Avenue Financal team show you how Purchase order financing solves this deadly cash flow gap, turning your confirmed orders into immediate working capital.
Current Banking Challenges
Business owners want to 'unlock' the cash and working capital that they have in inventory.
If your firm qualifies for traditional bank financing, you will be margined against the inventory, in much the same manner as a bank would margin receivables.
The challenge in the current financial environment is that banks, which have traditionally not enjoyed financing inventory, are even somewhat more reluctant to embrace this type of financing these days.
Available Solutions
So are there solutions?
Yes, there are. In Canada, you need to seek out and explore the services of a trusted and credible business financing advisor who can guide you through the inventory and P.O. financing maze.
The basic solution to the business inventory finance challenge is a collateralized loan against inventory. What has to be addressed, though, is the relationship of that loan or working capital advance to the security you might currently have in place against your business vis-à-vis receivables, etc.
That requires somewhat of a skill in order to satisfy all secured parties and give you the working capital you need in a manner that makes sense.
When This Financing Makes Sense
The exercise of obtaining this type of financing is worth it when you have a significant investment in inventory and your inventory asset can be collateralized and liquidated in some manner.
We say this because, as most business owners know, inventory comes in three forms: raw materials, work in process, and finished goods. So care must be given in the analysis of what type of inventory you maintain and what are those three different levels within your working capital cycle.
Ultimately, you should explore business inventory and purchase order financing (in P.O. financing, your suppliers are paid directly by the purchase order finance firm) if you are always short of cash flow and working capital, or have seasonality in your business cycle—i.e., huge amounts of product required for the Christmas season would be a good example.
Qualifying for Inventory Financing
Your firm is a candidate for business inventory financing if you can demonstrate the ultimate saleability of the inventory, as it of course becomes the main collateral.
If you are unable to demonstrate the marketability of your inventory as collateral, you will have a major challenge in obtaining this type of financing.
If your firm identifies inventory as a major working capital component and you have solid gross margins (inventory financing can be more expensive than traditional financing), you should explore the benefits of such business financing.
Case Study
Challenge: ABC Manufacturing received a $500,000 order from a major retailer but lacked the $350,000 needed for raw materials and labor.
Solution: Through purchase order financing, ABC secured $400,000 in funding within 4 days, covering all fulfillment costs.
Results: ABC delivered on time, earned $150,000 profit, and established a long-term relationship with the retailer, leading to additional orders worth $2.3 million over the next year. The financing cost of $28,000 represented just 5.6% of the order value, easily absorbed within their profit margins with new ability to accept larger contracts.
CONCLUSION - PO FINANCING WORKS!
Purchase order financing represents a critical lifeline for Canadian businesses facing the challenging gap between securing large orders and having sufficient working capital to fulfill them.
When your company lands that game-changing contract but lacks the upfront funds to purchase inventory or materials, purchase order financing bridges this crucial divide
Call 7 ParkAvenue Financial, a trusted, credible,and experienced Canadian business financing advisor.
FAQ
What types of businesses qualify for purchase order financing?
Purchase order financing works best for businesses with confirmed purchase orders from creditworthy customers, typically in manufacturing, distribution, wholesale, and service industries where there's a clear fulfillment process.
What are the main requirements for purchase order financing?
Purchase order financing requires confirmed purchase orders from creditworthy buyers, clear fulfillment plans, and the ability to demonstrate order profitability and delivery capability.
How does purchase order financing differ from traditional bank loans?
Purchase order financing focuses on your customer's creditworthiness rather than your business credit, making it accessible to newer businesses or those with limited credit history.
What costs are associated with purchase order financing?
Purchase order financing costs typically range from 2-3 % of the order value, depending on order size, customer creditworthiness, and fulfillment timeline. Invoice financing is the final part of the process.
When should a business consider purchase order financing?
Purchase order financing becomes essential when your business has confirmed orders exceeding available working capital and traditional financing options to fund supplier costs are too slow or restrictive. Borrowers pay interest only funds drawn down - similar to a line of credit.
Why do businesses choose purchase order financing over other options?
Purchase order financing provides faster approval, doesn't require collateral beyond the purchase order, and allows businesses to accept larger orders without straining cash flow.
How does the purchase order financing process work?
Purchase order financing involves submitting confirmed orders for approval, receiving advance funding, fulfilling the order, and repaying the lender once the customer pays.
What documentation is needed for purchase order financing?
The Purchase order financing company requires the actual purchase order, customer credit information, proof of your ability to fulfill the order, and basic business financial information around accounts receivable / accounts payable.
How long does purchase order financing take to process?
Purchase order financing typically processes within 2-5 business days, significantly faster than traditional financial institution / bank loans, which can take weeks or months.
Citations
- Canadian Federation of Independent Business. "Small Business Cash Flow Survey 2024." CFIB. https://www.cfib-fcei.ca
- Business Development Bank of Canada. "Alternative Financing Options for SMEs." BDC. https://www.bdc.ca
- Export Development Canada. "Trade Finance Solutions Guide." EDC. https://www.edc.ca
- Statistics Canada. "Small Business Financing Patterns." StatCan. https://www.statcan.gc.ca
- Canadian Bankers Association. "Business Credit Trends Report." CBA. https://www.cba.ca
- 7 Park Avenue Financial ."Purchase Order Financing Canada 101! PO Financing & Inventory Finance Solutions". https://www.7parkavenuefinancial.com/p-o-financing-inventory-financing-a-business.html
