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 required working capital and additional cash flow to buy the inventory required to fulfill that customer's needs.
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.
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 po... 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 a 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.
The exercise of obtaining this type of financing is worth it if 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.
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.