Purchase Order Finance Kicks into High Gear

You’ve heard the question many times before on Shark Tank. Do you have a confirmed Purchase Order? With Home Depot?  Walmart?  Best Buy?   Boyeah!  Thats great, lets make a deal.

If it was all that simple. Typically, you just made your big breakthrough as a start up and Mountain Equipment Co-op (MEC) agrees to submit you a purchase order for $75,000 for your innovative bike saddle bags.  Seems like they are convinced the bike riding trend is no longer a fad but a trend.  You are about to celebrate and then you do the math.

Let’s see, I have 45 day terms with MEC, it will take me 40 days of ordering raw material and production and another 10 days for shipping.   My raw material suppliers want paid upon delivery and my factory wants paid upon product delivery.  By the time I get the bags to MEC and submit my invoice (and wait did they say 45 days from invoice date or upon receipt of goods), I am out cash for at least 60 and in some case 75 days.

I dont have the money to fund this order and going through a bank is just too painful. And forget about applying to be on Shark Tank.

The situation described above is not uncommon. There are many boot strap businesses on the threshold of making it. Most cannot afford to go on the Shark Tank and find a friendly Shark.

This is where Purchase order financing comes in. Purchase order financing is a funding option for businesses that need cash to fill single or multiple customer orders.

Right now, there are select asset based lenders and factoring lenders that offer this lending solution.

Most lenders in this space will analyze the order – is it a replensishment order, a new customer, or just a forecast? What margins are being made?  What’s the potential for dilution?  These and other questions drive traditional factors.

According to Paul Schuldiner, SVP, Rosenthal Trade Capital, in purchase order financing, cash does not go to the business but to pay third party suppliers for the cost of the product and related logistics costs.  The cost of the financing is based on the funds employed (cash or off balance sheet credit) and is usually priced between 1.25 -2.5% per 30 day period ( prorated daily after the initial 30 day transaction period if still outstanding ). The average transaction period is 45-75 days.

Also, Paul mentioned it is typical for a PO financier to work in tandem with a receivables lender so the cost is transitioned to more conventional finance pricing once receivables finance repays the PO financing upon shipment/delivery/ and invoicing to the end customer who gave the PO to our client for product.

Another option is to use someone like Kickfurther, a crowdfunding fintech company that helps companies finance inventory.  As opposed to traditional factors, Kickfurther would take a % profit on the cost of goods or inventory.  In the example with MEC above, if the order had the following characteristics:

  • 1,000 piece PO
  • $10.00 cost
  • $20.00 wholesale price

Kickfurther charges 10% charge on cost of goods sold

  • Total Cost of Goods= $1,000*$10.00=$10,000
  • 10% profit offered on cost of goods = $10,000*10% = $1000
  • KF Cost of Goods = $10,000+$1000=$11,000
  • PO Value = 1,000*$20.00=$20,000

Net to business = $20,000-$11,000=$9000

Kickfurther’s profit would be $1,000 and the net to the company would be $9,000.

So the key differences is that Kickfurther only funds the value of inventory, it's not working capital that can be used for other purposes (like paying your electrical bill, etc). Using Kickfurther, the business gets paid when MEC pays them.  Kickfurther will pay for the inventory.

There are many variations of purchase order finance, some requiring letters of credit, or use of inspection agencies, etc. But Kickfurther is offering a novel variation.

I wonder what Amazon B2B Marketplace will do here if anything, in particular because they could be dealing with so many small businesses where this type of financing would be very helpful, especially for large or unexpected orders.

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