purchase order financing p o finance inventory financing

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Purchase Order Financing & Inventory Financing : Benefits & Risks
A  P.O. ( Purchase Order )  and Inventory  Financing Primer






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In the old days Canadian business owners went to their bank for PO Financing and Inventory financing... no really, they did... yes really! Most companies now know that the financing of your inventory, purchase orders, contracts, etc is a formidable challenge in the Canadian business financing landscape.

Simply speaking, your purchase orders, or inventory were collateralized by the bank and you borrowed against them. Therefore cash flow and working capital that was in effect tied up, or rather invested in your inventory and contracts was monetized, and you had the ability to draw down against those dollars.

Well the business financing landscape changed – yet your firm still has inventory, you have growth needs, and you need the financing to drive that growth into sales and profits. If you can acquire inventory financing then the ability to borrow against that inventory and purchase order is a key benefit.

So if the banks aren’t really that into inventory and p.o. financing in Canada, then who is. Well the reality is that it’s done via a select and specialized group of private finance firms who have a total knowledge and focus on the value of your inventory, and furthermore usually carry significant knowledge about your industry and the overall business model you operate in.

You should approach inventory financing with a positive attitude – by that we mean that your presentation for the financing should focus around the positive aspects of your business – those should include inventory turns, marketability of your product, and, very importantly, the gross margins associated with your business. We can categorically say that businesses with very low thin margins are not the best candidates for inventory and PO financing, simply because the financing costs around this type of financing chip away significantly at those final remaining profits.

We mentioned in our title that you should be cognizant of the risks associated with inventory financing – by all means don’t consider  the financing of out of date of very slow moving or unsaleable  stock – this quite frankly will be viewed simply as a ‘ cash grab ‘ that doesn’t make sense .

You will obtain a better inventory financing and p.o financing deal if you have good controls on your products – that typically might include a perpetual inventory accounting

Clients always ask if there are any special tips or tricks around the financing proposals around p.o and inventory financing. We tend to focus on the basics, which always work -   a listing, or preferably an appraisal of your inventory – updated financials, copies of pertinent purchase orders or contracts, and a business plan or cash flow forecast.

The bottom line is that 9 out of 10 financiers have never even heard of p.o financing or inventory financing, so seek the services of a trusted, credible and experienced advisor in this area to assist you in putting the right type of facility in place.  An experienced advisor in this area will help you avoid some of the potential risk, pitfalls, and financial ‘damage’ associated with inventory and p.o financing gone awry. They might include higher than market rates,   requests for additional hard collateral, locked in contracts you can’t get out of, or inordinate appraisal and inventory count costs.

If you are successful in avoiding those risk the benefits will clearly be obvious - the ability to grow sales with unlimited financing of new sales or contracts, quick turn around for approval, and cash flow benefits derived from your suppliers being paid directly by the finance firm. Additionally you may be in a position to negotiate better pricing on products, thereby improving those gross margins we talk about. 

PO and inventory financing, its all about risk and reward – understand those risks, seek an expert to minimize them, and reap the benefits of increased sales and profit growth.  

















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