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SME Business Finance In Canada : The  Inventory and Purchase Order Financing Challenge
Purchase Order Financing & Inventory Financing In Candada  - A Thing Of The Past? Not Really !!






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Inventory and Purchase order financing are two of the most sought after and challenging financing strategies for Canadian business owners and financial managers. The reality is that if you can ensure you don’t have adequate working capital and cash flow to finance inventory, and of course receivables, your business will be hamstrung in respect to your ability to grow sales and profits. 

The essence of an inventory financing strategy is to ensure that you have capital and cash flow as part of a revolving facility or loan to purchase inventory from your valued suppliers, and convert that inventory into receivables, cash, and of course profits.

Inventory financing and purchase order financing in Canada come in various forms. The most traditional form it comes in is of course as a component of your bank operating facility. Canadian chartered banks ‘margin' receivables and inventory. The challenge in the global financial climate of 2010 is of course your firm’s ability to negotiate such financing on terms favourable to both yourself and the bank.

In our experiences banks tend to me for focused on lending on receivables, which can easily be converted into cash. The harsh reality is that many banks and lending institutions in Canada don’t understand the true value of your inventory, and quite frankly we think they can be forgiven for that, given the multisided of industries in Canada, as well as the fact that inventory comes in three components.

The three components of inventory are raw materials, work in process, and of course finished goods. The mix or ratio of those three components is going to vary in each firms industry. 

Our own experience is that when our clients can generate inventory financing as a part of their overall operating credit strategy is they usually come up with something in the 40% range. That is to say that your bank will advance, at any given time, up to 40% of the inventory that you are carrying at your cost. This tends to be a comfortable buffer for the banks, but in many cases doesn’t provide the cash flow and working capital you need to grow sales and profits. We hasten to add of course that bank operating facilities that include an inventory component are closely tied to the overall financial health and financial perception of your firm.

Are there other solutions for inventory and purchase order financing in Canada .Yes, there are, we can also certainly say they are limited. We suggest you align yourself with a business financing expert who can explain to you those methods, which include a straight separate purchase order or inventory financing facility that is outside of your banking arrangements. In those cases the experienced p.o. and inventory lender will determine a valuation on your particular inventory and lend against that. In most cases this simply involves paying your suppliers upfront for your inventory needs, while they collateralize your inventory and the receivables that will flow out of that inventory. This type of financing is expensive but has to be benchmarked against the possibility of your firm losing sales, contracts, and competitive stance in your marketplace.

At the end of the day Canadian business owners and financial managers have to simply address the following issues:

  • Is my firm losing valuable sales and contract opportunities to competitors due to our inability to finance and pre pay inventory?

Are we prepared to lower our overall gross margin by 2-3% points in favour of increasing sales and profits? Speak to a trusted, credible and experienced business financing advisor in this area:   A rational inventory financing strategy can then be developed around those two key points.

















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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil