Turn Your Business into a Growth Powerhouse with One Simple Insight
The Secret to Financing Growth
You’ve just received a terrific opportunity: The sale that will take your business to the next level. Nothing in small business is as exhilarating as a sudden growth spurt that comes from a big order. But after the thrill of the deal, how do you deliver the goods without overstretching yourself at the bank? When you make a big sale you’re going to need supplies to complete the order. But you could well run into suppliers who don’t want to risk sending you supplies without getting paid up front. Consider their position—they may be wondering if you can really deliver that big sale, and whether your ultimate customer will pay in a timely manner. They might not be willing to risk selling to you without payment up front.
What can you do to satisfy your suppliers while getting the materials you need to complete your sale to the big customer? One solution that many smart small business operators rely on is purchase-order (PO) financing, and it can be a genuine lifeline at times like this. PO financing can cover up to 100% of the costs of producing goods by paying your suppliers either with a letter of credit against production or payment against bona fide shipping documents. You and your financial institution arrange for inspection of completed goods before payment goes out, protecting you and the financier.
Robert Thompson-So, Vice-President and Chief Strategy Officer at Liquid Capital, says PO financing typically covers two types of deals. One is pre-sold finished goods shipped directly to an end buyer, to a third-party warehouse or shipped and monitored to a client’s warehouse. A second type of deal is to fund works in progress.
You need to understand that PO financing is not a loan, Thompson-So says. “It is essentially an advance on funds to cover suppliers’ bills. A financier agrees to pay your supplier for goods pre-sold to your customer. They then collect the invoice from the end customer and retrieve the moneys advanced you, minus a fee.”
Another benefit is that PO financing doesn’t require a perfect credit history on your part. The financial institution will, however, be vigilant about your ultimate customer’s creditworthiness because that is how it will get repaid. So if you have average credit, you can feel confident about using PO financing.
Even if you’re using PO financing, always be sure to watch your cash cushion. PO financing is no substitute for vigilance over payables and receivables. Run a simulation on what would happen if your customers got behind in their payments—would it affect your ability to attract the kind of big orders PO financing would help you with? Would it hamper your credit rating? Consider electronic invoicing so you can track your payments at all times. This will be important as your business grows with those big orders coming in.
Robert Thompson-So, CIM, FCSI, CHFS is the Vice President and Chief Strategy Officer of Liquid Capital Corporation. Since 1990, Robert has been active in various aspects of corporate finance, capital markets, insolvency, and restructuring. He has held a range of senior positions with numerous alternative investment and financing companies. Robert understands the unique challenges of growing businessess and is well versed in alternative financing, capitalization structures, and working capital lending that helps businesses grow to their maximum potential and value.