Is Financing Inventory and Financing Purchase Orders Actually Possible In Canada – Yes You Can!
The Myth of Inventory and PO Financing debunked!
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It's not a myth or urban legend. Financing inventory and financing purchase orders in Canada is actually possible and in most circumstances, the cost of this financing is significantly offset by your firm's ability to increase sales, generate additional profits, and lower competitive pressure. The bottom line is of course more larger orders and contracts, in some cases from clients you were not able to satisfy in the past based on our financial strength or other challenges.
Let's step back a bit and define some of our key metrics. In its simplest form, the financing of inventory is simply your ability to finance, or rather, 'margin' inventory on an ongoing basis. The inventory is of course simply the collateral. Clients talking to us about seeking specialized inventory financing are often in the position of having inventory form a large part of their current assets, in conjunction with accounts receivable of course.
So in a perfect world, you go to your Canadian chartered bank and ask them to finance your inventory and free up cash flow. It’s that simple right? We can hear you already in the background, and we'll be the first to admit it’s not a perfect world. Even seasoned Canadian business owners and financial managers realize the inventory is not high on the list of bank financing in Canada, especially if you are a small or medium-sized firm that does not have the bench strength to satisfy typical bank criteria which focus around everything EXCEPT inventory, i.e. ratios, covenants, external collateral, personal guarantees, etc.
For inventory financing to make sense you should realize that your inventory has to be marketable, it can’t be old, stale and slow-moving. You also have to be in a position to demonstrate that your inventory turns regularly and that you have sufficient gross margin to carry the financing costs associated with financing inventory and financing purchase orders. P.O. Financing is of course the 'kid sister' to inventory finance, and such a facility contemplates direct payment to your suppliers by the P.O. financier allowing you to of course satisfy supplier payment amounts and terms, while at the same time fulfilling client orders and contracts.
So if the bank is not your best bet, how actually are these two asset categories financed? The reality is they are financed by specialized firms, and in the case of inventory pure play financing, we encourage clients to bundle their inventory financing with a full asset based lending line of credit via a non bank private finance firm. This type of facility margins both inventory and A/R to maximum leverage, giving you in essence unlimited working capital to grow.
To qualify for financing inventory and financing purchase orders you should generally have solid management and industry experience, good accounting and reporting around your inventory, as well as the aforementioned marketable product that can be resold by the financier if a problem arises.
Speak to a trusted credible and experienced Canadian business financing advisor on ensuring your understand the benefits and qualifications for this valuable financing tool and strategy.
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