PO Financing- the ideal financing tool for the right situation
By Mike Semanco, President, Hennessey Capital
For many entrepreneurs, landing that large purchase order is just what the doctor ordered. You worked hard to win the client, outlasted the competition and are in a position to build on your success. The team celebrates until someone asks, “Do we have the cash to purchase the large amount of supplies needed to deliver the project?”
Growth can be a major drain on a company’s cash and a major reason why we stress the importance of cash forecasting.
Although purchase orders are covered in the Uniform Commercial Code as an asset of a business, it is not an asset that is easily financed, unlike accounts receivable, inventory, equipment or real estate.
Purchase order financing is offered by very few finance companies and is usually best suited for distributors. Manufacturers and service providers are not ideal candidates for PO financing due to the concern of performance risk. PO Financing for distributors allows for the securing of goods by way of letter of credit (promise to pay once certain stipulations are met), so that the distributor can increase its buying power with suppliers. In the case of a distributor, they are not responsible for manufacturing the product so performance risk lies with the supplier. PO financing will be structured so that the supplier will not receive payment unless they produce the proper product as defined in the PO, which eliminates the issue of performance risk and thus satisfies the PO funding source.
PO financing carries more risk to a lender than traditional A/R financing thus the cost is more than traditional A/R financing. Due to the increased cost, companies must make sure they have sufficient margin in the order. PO financing is typically used in conjunction with an A/R line of credit or factoring facility so that once the product is received by the end user, invoices can be financed and the cash can be used to repay the PO funding source. This opens up the PO finance facility to be used for new orders.
Purchase order financing is not ideal for every business but in the case of a distribution model where product needs to be purchased and sold to large entities or retailers, it could be a great tool to secure the cash needed for new growth.
When to Consider Hiring a Temporary CFO
By: Jeff Wright, Senior Vice President, Hennessey Capital
In my 27 years of asset-based lending and commercial loan workout experience, I have consulted with many small businesses that know how to manufacture a product but have difficulty managing the financial aspect of their business. This includes companies that are experiencing significant challenges as well as growth-oriented companies. Many rely on trusted advisors like their CPA, banker, or attorney to provide assistance on financial matters affecting their business. However, these key advisors are often handling many clients, or may not have experience in your industry to provide targeted guidance on some of the complexities of the situation. When this is the case, a temporary CFO can provide invaluable insight and expertise in evaluating and managing your business finances. Owners can draw on the CFO’s experience to fill skills sets management does not possess. This frees up management to address operational issues and marketing initiatives. Owners, however, must be willing to give up some control.
It goes without saying that small businesses need strong financial support in place. A temporary CFO with experience in the industry can provide invaluable support in the strategic planning, budgeting, and cost control for a small business as they grow. Their objective opinion can be helpful when considering taking on a new project, investing in new equipment, or evaluating overhead expense to improve cash flow. A temporary CFO’s experience can also be used as a resource when discussing financing options with a lender or suppliers, and in dealing with customers. They can also implement financial systems to monitor the financial performance of the company and provide timely reporting to help management make educated business decisions.
The primary role of a temporary CFO is to manage the cash of the business. Ownership can draw on their skills on an as-needed-basis without expending significant dollars usually required for a full time CFO. If you could use additional assistance in managing your financial operations and benefit from an outside perspective, it may be time to consider a temporary CFO for your business.
SBA Lending: Down But Not Out
Filed under: Business Tips & Tactics, Finance Talk
Although SBA lending is down sharply in 2009 compared to 2008, the movement of new activity as of late, is a positive sign of good things to come. Even a slight increase in activity will give entrepreneurs some level of hope that a bigger credit thaw will happen in 2010. In the meantime, entrepreneurs need to be creative and think outside the bank box for financing solutions. Asset-based lending, factoring, PO financing and equipment leasing will continue to be viable solutions to today’s financing challenges.
4 Things Small Business Investors Are Looking For
Whether you are already in business and searching for additional capital and/or a new finance parter, or you are considering embarking on a new entrepreneurial adventure, there are some key criteria investors will consider:
- A business plan that describes the market opportunity. The value the the business will deliver and its acceptance in the marketplace must be clear. In short, there must be a compelling reason the business exists. NOTE: An executive summary is key. Most investors do not want to see, nor will they take the time to review a 50-page marketing plan.
- A capable entrepreneur. Since their money will be in your hands, the entrepreneur must convince the investor/lender of his or her competence, commitment and integrty. You are the business.
- A realistic financial plan. You need to know how much capital you will need, when you will need it and how it will be deployed in executing the business plan. Sure, $1 million sounds great to any business owner, but is that really your cash need and how to plan to use it?
- An exit strategy. How and when will the investors get their money back and what is the expected return on their investment?
4 Months and Still Going…
Multiple media outlets reported of the consistent 4-month uptick in SBA lending. Better yet, all signs indicate that this type of lending will continue to increase through the remainder of 2009. “I think it’s a continuation of the impact of raising the percentage that we guaranteed to 90 percent and the elimination of the fees to the borrower,” said Richard Temkin, U.S. Small Business Administration District Director. “And the banks’ credit requirements perhaps are loosening somewhat, though that seems to be a slow process.”
So, what does this mean for small businesses? This is an encouraging trend that hints that credit markets are starting to thaw from the deep freeze of early 2009 and that banks are increasing lending. For entrepreneurs who have been struggling for the past year, this is good news. Those who are fortunate to still have a traditional bank loan are more likely to keep it. Those of you thinking about starting a business and considering a SBA loan, might just be in luck. Overall, this is a positive sign that Michigan may have hung the “open for business” sign back outside its window.
Small Business Loans Criticized
Monday President Obama released a plan to increase the federal guarantee of small business loans to 90% and decrease fees associated with the loans. However, the action is being met with significant criticism. Read the Wall Street Journal article: Small Business Loans Criticized
Access to Capital Webinar
Entrepreneurs throughout the country are encountering challenges in gaining access to capital. With credit markets dried up and few banks lending to small businesses, it’s become increasingly difficult for small enterprises to get the working capital they need to grow their business. If you are interested in learning more about the financial spectrum and where to turn when your credit line shrinks, register for the upcoming “Access to Capital” webinar.
Thursday, March 18
9 a.m. EDT
E-mail name and company to: Nicole@macombcountychamber.com.
Entrepreneurial Do’s and Don’ts
Entrepreneurs are an industrious group. Their relentless curiosity and willingness to take risks often propels them to success. However, no one wants to take risks when it comes to financing their business. The financial landscape can be a confusing place for small business owners looking to establish or grow their business.
Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.
