From apparel to fixtures to thermoplastic resins, King Trade Capital is funding growth for companies from coast to coast.

“Plastics”

King Trade Capital (“KTC”) recently provided a $10,000,000.00 purchase order funding facility for a California distributor of plastic resin. The company was introduced to KTC by its current senior lender because the company needed a unique purchase order finance solution to fulfill its growing orders.

The poly resin distributor has seen its business recover significantly after several difficult years of declining sales. The Company’s bank relationship was allowing it to maintain current sales levels; however, the lack of additional supplier credit was forcing the company to pass up on sales growth opportunities with valued customers.

KTC was able to assess the client’s needs and structure a transaction that allows the company increased buying power with its suppliers. KTC was not only able to complete its due diligence quickly, but also implemented a financing system that would enable the client to purchase resin from its suppliers and have product shipped to fill orders within 24 hours.

Speed, capacity and cost were critical aspects that brought this client to King Trade Capital. The client was looking for a cost effective, professional funding relationship as the lead times from receiving the orders to purchasing, shipping and invoicing is only a matter of a couple of days to a week. The funding facility that KTC was able to implement ensures that the company can get several additional inventory turns per month and increases sales exponentially.

Bryan Ballowe, COO of King Trade Capital remarked, “This is a perfect example of how King Trade Capital not only provides the necessary capital for companies to realize immediate sales growth opportunities, but also how we listen and understand what the company needs in order to provide a unique solution to maximize their profits.”

You Have to Wear Clothes

KTC also recently provided a $3,000,000 trade finance facility for a New Jersey company in the garment industry when a factoring company approached us with one of its existing clients that was growing very quickly. The factor asked KTC to review a purchase order finance solution that would help the garment company buy more inventory to fulfill their growing purchase orders. Although the factor had a longstanding relationship with the client they weren’t comfortable providing an over advance to help the client fulfill its recent spike in sales.

KTC contacted the client and learned they had been working to win new business with a large retailer for months and finally landed several large orders for various items for the holiday season. This was a new retail relationship, and the client needed to move very quickly in order to issue letters of credit to the overseas supplier in order to ensure timely delivery. KTC was able to complete its due diligence promptly and put in place a $3 million purchase order trade finance facility. KTC was instrumental in structuring a letter of credit with the overseas factory with suitable inspections, shipping terms and insurance requirements in order to ensure a successful delivery to the end buyer.

Goods are currently in production and set for shipment in August. Once the goods are shipped and invoiced to the end customer, the factor will advance on the resulting invoices and repay the amount due KTC.

Bryan Ballowe, COO of KTC commented, “This was a great opportunity for us and our client. Our purchase order financing solution allowed our client to ensure a timely delivery with its new customer. Additionally, this transaction illustrated how we not only move fast, but provide our expertise in structuring sound international transactions.”

KTC is a Fixture in Finance

A previous client that manufactures fixtures and displays recently returned to King Trade Capital with an immediate need for a letter of credit to buy inventory to fulfill a large one-time order from an important customer. The order entailed signage for 1300 stores across the country and needed a fast turnaround.

KTC financed this company in 2009 and after providing a successful purchase order finance solution that helped build their balance sheet and profits, we introduced the client to a traditional lender that has successfully financed them ever since.

However, with the size of this order and the capital need to purchase the inventory, the client and their lender returned to KTC for a purchase order finance solution that works in conjunction with the senior lender. Since KTC had a good working relationship with the lender, we were able to expedite an Intercreditor Agreement allowing KTC to offer a finance solution the lender was unable to provide. Within 8 business days, KTC funded the letter of credit to an overseas supplier to support the immediate production of the goods needed to promptly fulfill the order.

Give King Trade Capital a call today and see how we can help grow your business -whatever your individual purchase order financing scenario is. As the most experienced purchase order and trade finance company in the country, King Trade Capital is uniquely qualified to find a solution for you.

Bryan Ballowe, Vice President and COO of King Trade Capital has been asked to be a panelist at the CFA Entrepreneurial Conference in Dallas this week. The panel is entitled “Market Segment Update: Transportation, Government, Purchase Order Finance and Staffing,” which will address how each of these market segments may be a barometer or an early warning of where the economy is heading. Bryan and the other panel members will discuss the current business environment and where these segments are headed relative to business activity and opportunities. The panel is touted by the CFA as, “A look into the crystal ball at these market segments and the credit demand with these segments.”

GO TEAM! Collegiate Licensed Apparel

King Trade Capital was recently contacted by a factor trying to win a new client. The factor recognized the prospect had excellent potential for growth and that PO financing would help augment their offering and win the client’s business.

The client is a relatively early stage apparel company selling collegiate licensed apparel to several established national campus bookstore chains. The client received several purchase orders to initially test their items in regional stores. The bookstore chains sold through the apparel much faster than anticipated and immediately opened up conversations with the client to expand the clothing line and the quantities purchased into large national programs.

The client’s hard work in developing its apparel designs and quality along with cultivating the relationships with its customers had now paid off. The only thing separating them from the opportunity to significantly grow their company was a limited balance sheet to support the future growth. King Trade Capital came up with the perfect import finance solution.

When introduced to the client, King Trade Capital issued a proposal and upon acceptance immediately moved forward with due diligence. In the meantime, the factor was able to establish their relationship with the client and provide liquidity on the existing receivables of the client allowing them to fulfill their initial orders, which was a win-win for the client and the factor.

However, as the factor and client had predicted, the rapid sales growth came quickly as the client and its customers solidified a national rollout plan which included additional clothing lines and increased quantities. The large orders led to much larger letter of credit needs in order to manufacture and import the inventory necessary to fulfill the orders.

Working in conjunction with the factor, King Trade Capital issued letters of credit to a factory in Sri Lanka to support the production of the goods that would be needed to fulfill some $500,000.00 of initial new orders. As goods arrived in the U.S., King Trade Capital worked with the company’s freight and logistics provider and made payments for related freight and duties. As a result of the funding, the client was able to grow their existing apparel supply program and expand their product offering into additional college campus bookstores across the country.

King Trade Capital now has a facility in place to support any future sales opportunities as the client continues to grow its business. Thanks to the historical relationship between King Trade Capital and the factor, together they will enable the client to reach its full growth potential.

Apparel and More Apparel

Recently, another apparel company faced with a challenge approached King Trade Capital for a solution. This established company, having been in business since 2005, had historically financed all sales using the owner’s capital and cash flow of the company. This structure had worked well for the company through FY 2010. However, in 2011 business was growing and the company received a $1.1 Million order from their main customer. This single order represented a sale that was larger than what the company could finance.

The owner’s capital was already deployed for production being completed to fulfill the normal day to day orders, leaving him in search of capital. King Trade Capital stepped in and provided a $650,000.00 LC to the overseas supplier who produces the majority of the company’s goods and also carved out additional funds to pay for the related freight and import duties. We provided the excess capital to the client so they could fulfill the largest order in company history.

The buyer for the major retailer has seen that the KTC client was able to perform and fulfill the larger order and has approached them with new business opportunities of similar size, putting the company in a favorable position to exponentially grow the top and bottom lines of their business without having to give up equity or control to new investors.

As a factor, asset-based lender or bank you understand the important role a qualified purchase order finance company can play in providing added value to enhance your relationship with client companies. 

There are a few experienced purchase order financiers but some offer the service without understanding the risks or capital needs.   How can you be sure to build a relationship with the right p.o. finance company? You need a p.o. finance company that is going to both enhance your relationship with your client and offer the best solution for them.  Please consider these important points when choosing a partner in purchase order finance.

How Long Have They Been in Business?

In recent times, newcomers have set their sights on purchase order finance or have reentered purchase order finance after securing new financing. These companies have little specific experience in the field of p.o. finance and don’t have the depth of knowledge required to structure deals that will be of greatest benefit for both you as the senior lender and your client companies.

King Trade Capital has provided the widest selection of purchase order finance solutions available in the market for more than 17 years.

Whose Money Are They Using?

In some cases, those offering purchase order finance have outside investors with varied agendas which can make receiving the needed funding hit or miss.  Not to mention a lengthy approval process of selling the outside money source on the purchase order financing.  On the other end of the spectrum banks that offer p.o. finance, as one of their many finance options, encounter red tape that slows or even halts the process of getting your deal done.

King Trade Capital is in the business of providing purchase order finance and has its own capital, allowing us to make internal decisions quickly, providing the funds when they are required.

How Much Money Do They Have Available?

Be on the lookout for undercapitalized p.o. finance companies.  Many start ups or restarts will promise you the moon, but then when it comes time to back it up with cash they just don’t have it.  Be sure to ask if they actually have access to the amount that is needed for your deal or if they have to request it from someone else.

King Trade Capital is the largest independent purchase order finance company in the US and internally makes all its funding decisions.

What about Flexibility?

We all know that no two companies are the same, especially when it is a company in need of alternative capital in order to grow.  Because King Trade Capital is independent and has its own capital dedicated to purchase order financing, we are able to be flexible with deal structure in order to offer a solution to get a deal done.

How Much Experience?

Do they have years of experience in p.o. finance? Is purchase order financing simply a lead into other financing?  Will they finance manufacturers?  Do they have bankruptcy and turnaround experience?

King Trade Capital has been in business longer than any other independent purchase order finance company in the country and can bridge almost every capital need in order to help fulfill purchase orders.

What is Their Response Time?

When a business opportunity presents itself, the time to act is NOW.  However, with some purchase order finance providers by the time you get a decision, the opportunity may have passed by.

King Trade Capital is known for fast response.

King Trade Capital sets the standard in purchase order finance.  As the largest independent purchase order finance company in the country, King Trade Capital has the most experience, available funding and flexibility to complete your deal in the quickest time possible.  Your client company will have their decision and their funding quickly, adding value and enhancing your relationship with them.

To say there are intricacies in financing a company in a turnaround situation or bankruptcy is an understatement.  Companies in these situations have a myriad of different problems that can range from being out of compliance with an existing lender, to overdue trade payables, to missed sales opportunities.  These problems are closely interconnected to each other and may prove difficult for a company to overcome.  Providing financing to a company in a turnaround or bankruptcy situation can prove even more difficult and requires “outside the box” thinking.  First, the finance company must decide whether the client is viable on an ongoing basis.  Management is a very key component.  What steps has management taken to turn things around? Do they have experience in this arena, or are they the same management that led the company down the wrong path to begin with?  Next, several key items such as security issues and key  business relationships must be addressed, and the new finance company must be creative and nimble enough to implement a structure that will protect them from many of those legacy problems that exist.  An alternative form of financing such as transactional based Purchase Order financing is a viable option for companies to turn to in order to finance sales growth in a turnaround and/or bankruptcy situation.         

Let’s first examine a company that is in a turnaround situation. We’ll call them ABC Company.  ABC Company supplies seasonal gift items to big box retailers.  Seasonal businesses are inherently risky since the cash flow of these companies fluctuates significantly and working capital can be unpredictable.  ABC’s business over the past two years has been down due to the sluggish economy. However, this year the company’s backlog of orders has grown significantly.  Unfortunately, ABC’s balance sheet has taken a significant hit as previous years’ losses have hit its retained earnings and payables and other short term debt has ballooned. ABC’s senior lender is already in an overadvance position and the company’s critical suppliers won’t extend additional credit to ship product.  Therefore, the company can’t finance its uptick in business through traditional means.

Next, let’s focus on a manufacturer of skin care products that recently filed for Chapter 11 bankruptcy protection.  We will call them XYZ Company.  Previous ownership spent significant money trying to grow different business segments at the expense of the core business line.  Unfortunately, the new business segments didn’t work out.  XYZ has tripped multiple financial covenants with its bank and the bank wants to exit the relationship.  While the bankruptcy filing helped alleviate much of the pressure from the unsecured trade debt, the company is on COD payment terms with most of its critical suppliers.  The company’s ownership is unable to put any more money into the company as they have tapped their personal resources funding general overhead just to keep the company alive.  However, the company’s backlog has recently grown back to previous levels.  If the company had access to capital, they could begin to fulfill new orders and turn things around.

There is a common theme that resonates in both of these situations.  Neither company has access to traditional financing or supplier credit to fulfill their spike in business.  Purchase Order funding can provide an excellent solution to help turn both of these companies around.  The key is to understand how Purchase Order financing can be implemented.  In any turnaround or bankruptcy situation, the company must be able to demonstrate how it is going to be a viable concern on a going forward basis. It must have a backlog of business that it needs to fulfill in order to benefit from Purchase Order financing.  A Purchase Order finance company must also address and solve the following key issues:

1. Do you believe in the company’s plan and the management’s ability to execute?  Is the backlog growing?  Does the company have firm, valid orders in hand from credit worthy end customers?  Are the sales projections believable?  How are the margins trending?  Can management grow sales and focus on growing margins and profitability?  How exactly are they going to do that?  Remember, it’s not necessarily the top line that matters, but whether the company is cash flowing positive.  Cash flow is the ingredient that keeps companies alive and adequately servicing its regular obligations.
2.  Dealing with the existing senior lender—Are you secured? Is the existing senior lender willing to carve out specific collateral and subordinate its security interest to that of the Purchase Order finance company? The subordination will need to address matters such as priority rights of assets, co-mingling of physical collateral, control of cash, rights under default, etc.  A Purchase Order finance company must address how to segregate and monitor not only goods, but also cash payments.  It’s paramount for the Purchase Order finance company to implement a plan to be able to monitor collateral and cash constantly and move fast if something goes wrong.
3. Dealing with the Bankruptcy Court-Are you secured?  Under many circumstances, providing Debtor in Possession financing (“DIP Financing”) can be a very secure way to provide new financing.  DIP Financing has a super-priority administrative claim in the bankruptcy, which means the DIP lender is the first creditor repaid upon confirmation of a reorganization plan. When there are multiple lenders providing DIP Financing, it can become a bit tricky. What happens if the bankruptcy court recognizes the senior lender’s pre-petition rights in the bankruptcy plan?  If the existing senior lender is not willing to provide financing going forward but demands to have priority rights in bankruptcy, the Purchase Order finance company must be comfortable with its position on specific assets and the rights to repayment in a default situation.  If the existing lender is not willing to lend any further, the Purchase Order financer should demand a priority right to all post petition collateral in order to provide new financing to the company and be adequately protected.
4. Dealing with the trade payables.  If the company has filed bankruptcy protection and the reorganization plan has been agreed to, then the unsecured vendors are not an issue unless they are critical vendors that the company needs to buy from in order to continue operations.  Regardless of whether the company is in bankruptcy or not, the Purchase Order finance company must identify those critical vendors and verify under what terms those folks are willing to supply product.  If the critical vendors aren’t willing to do business with the company anymore, who will the company buy from?  If the company has not filed for bankruptcy protection, and the trade payables are significantly overdue, the Purchase Order finance company must confirm what the company is doing to address those issues.  Are there payment plans in place?  What judgments have been awarded?     
5. Dealing with the customer base. In a turnaround and/or bankruptcy situation it is critical that the Purchase Order finance company make sure that the client’s relationship with its existing customers is in good standing.  Many customers rely on their suppliers to be able to handle warranty or ongoing service claims.  If the customer base gets wind of financial troubles, outstanding payments can be withheld or significant deductions can be taken unilaterally by the end customers.  Additionally, future business can be affected if the customers are concerned about the financial wherewithal of the client.

In both scenarios detailed above, each company must find an alternate source of capital to help fulfill profitable backlog that can help get the company back on the road to financial stability.  Purchase Order finance is an excellent solution to provide the needed capital to fulfill orders when traditional financing and/or supplier credit is simply not an option. However, a Purchase Order finance company must have the foresight to address many of the day-to-day issues that could ultimately affect its position.  A Purchase Order finance company must identify the critical components of a specific business and watch them closely in order to react quickly to any problems that may arise.

By Chip Scoggins, Business Development Manager

The purpose of this article is to relate an understanding of the situations where purchase order financing may be appropriate and the risk analysis on a company from a purchase order finance perspective. 

Purchase order financing is essentially a facility to satisfy an interim need for a company to take advantage of a short term opportunity.  The following are a couple of primary situations for dealmakers to consider purchase order financing to provide the flexibility of a solution in facilitating that interim capital need.

-  A prospective company has potential for growth but currently does not meet the criteria for a minimum investment and return required of private equity.  Purchase order financing can bridge this gap, facilitate the company’s growth and create a future opportunity for the dealmaker.          

-  A portfolio company where current traditional financing has become fatigued or maxed out on extending more credit.  Private equity may either invest more capital, possibly having to restructure ownership or has determined that the return on any additional capital investment in the company is not of strategic interest.  Purchase order financing is an alternative to a long term debt instrument when the need is a short term infusion.  It can also potentially help to avoid further deterioration in the financial condition and value of the company by the necessity to downsize and reduce the capacity of the company to generate profits.         

Purchase order financing is “transactional equity” since it steps out beyond the scope of traditional financing.  However, it does not dilute ownership.  The collateral associated with purchase order financing is the goods, materials, parts, etc. that the company needs in order to fulfill the order.  In the world of purchase order financing, the order is fulfilled when it is invoiced, and as a result, creating traditional collateral for whoever is financing the company’s accounts receivable, be it a bank, asset based lender or factor.    

Since purchase order financing is based on pre-sold goods, the company must have a firm order from a credit worthy customer.  The amount of purchase order financing is contingent upon the advance rate on accounts receivable established by the company’s bank, asset based lender or factor, in order to take out the amount of purchase order financing, plus fees.  That relationship is established between the parties through an intercreditor agreement.       

The following examples attempt to illustrate some general scenarios from finished goods to production and evaluation of each from the purchase order financing perspective.   As with all purchase order financings, a key element in evaluating risk is the company’s gross margin.  Value of the collateral to the market is in theory worth more the larger the gross margin.  Therefore, the easier it will be to find another buyer if the purchase order is cancelled by the company’s customer and the higher probability of the funds employed by purchase order financing getting repaid.  In addition, the more specialized the product is to the company’s customer, the more risk associated with finding another buyer.

Finished Goods:  Manufactured overseas drop shipped directly to company’s customer

The goods are produced, packaged and ready for delivery to the company’s customer by the factory/supplier overseas.  The order is completely fulfilled by the overseas supplier.  The goods are paid for by purchase order financing through letters of credit or documents for payment and all that remains is the delivery of the product to the company’s customer.  The finished goods being drop shipped directly to the company’s customer mitigates the risk of the client touching the goods and any reliance on the company’s ability to perform in physically handling the goods.  The risk is essentially transferred from the client to the factory producing the goods and third party logistics for handling the goods and/or staged at a third party warehouse for delivery to the company’s customer.

Finished Goods:  Delivered to a domestic third party fulfillment warehouse.

In this case, the process entails different items; each item on its own is essentially a finished good but assembled by a domestic third party fulfillment warehouse into a final product for delivery to the company’s customer. 

As with goods drop shipped directly to the company’s customer, the risk is transferred to a third party entity in the handling of the goods in fulfilling the order to the client’s customer.  However, risk parameters increase due to funds being employed by the purchase order financing to suppliers, either foreign or domestic, for goods to then be delivered to the fulfillment warehouse for final assembly of the finished good.  Although not a requirement, some history of the company utilizing the suppliers and fulfillment warehouse will obviously offset a considerable amount of the risk.  Regardless, the suppliers and fulfillment warehouse will be vetted out in the due diligence process confirming their ability to perform.        

Finished Goods:  Manufactured overseas delivered to company’s own warehouse/facility.

In the prior scenarios, the goods were handled by third parties.  In this case, the goods come in to the company’s own warehouse where they have to be picked, packed and shipped or some additional value add by the company to fulfill the order.  We now have to evaluate the history and ability of the company to physically perform.  Although the process may be simple, the company must not only have the capacity to fulfill the order but also have verifiable cash flow from other sources than purchase order financing to cover overhead to fulfill the order.  If these facts are not evident, an alternative may be a requirement that the company use a third party fulfillment warehouse to fulfill the order.       

Production Deal:  The company utilizes a domestic contract manufacturer in fulfilling an order:

The production risk is transferred away from the company to the contract manufacturer.  The emphasis is then put upon the contract manufacturer’s ability to perform.  Acceptable risk is a contract manufacturer that has experience in the business of producing this product and sustain due diligence with references.  In most cases, the contract manufacturer will require a deposit or assurance to get paid to begin production or payment to release goods.  Since it is a domestic contract manufacturer and verified through due diligence the ability to perform, this is a viable transaction even if it is an early stage company.  History with the use of the contract manufacturer is not a requirement but certainly helpful in evaluating the risk.   

Production Deal:  The domestic company is producing the goods

Known as production finance or work in process financing, a product is being produced by the company and shipped to the company’s customer.  Since purchase order financing provides only direct costs in fulfilling the order, the company must have a proven history of not only producing the product but also the capacity and the cash flow to cover other non-direct costs.  Purchase order financing can include the cost of materials, parts and direct labor to fulfill the order.

The company must be profitable or at least cash flow neutral.  The basic concept in mitigating the significant risk associated with production finance is that the order being financed is incremental sales to the company, i.e., if the company lost the sale, it would still be a going concern.  In most cases, the company has maxed out not only the credit lines with their suppliers but also their borrowing capacity with traditional financing sources.    

In addition, two main items must also be addressed in the initial assessment of the potential for purchase order financing on a production deal:  (1) the number of suppliers required to fulfill the order; and (2) the time involved with the production cycle. 

The greater the number of suppliers means more work required in due diligence in vetting out the suppliers and ability to control the collateral of raw materials and parts delivered to the company. The fewer the suppliers, the more likely that production is of a low tech nature.  The more suppliers, the more involved the production process and more risk associated with the transaction.

Ideally the production cycle is in days or weeks and the company can invoice as product is produced and shipped, especially on larger orders.  If the production cycle is much more than 60 days, the cost of purchase order financing to the company and the risk with the longer exposure of employed funds by the purchase order finance company, the transaction may not make economic sense for either party.    

Full understanding of the production process is essential in assessing the risk.  In general, there is less risk associated with light assembly where the work done by the company is relatively simple.  This includes fabricators, cutting, sewing, mixing, packaging, etc.  On the other hand, full production deals are considered a higher risk when the company is taking more of a raw material and production involves tooling, molding, milling, etc. in producing a finished product.

Purchase order financing must make economic and strategic sense for the company.  It can facilitate growth, enable a company to take advantage of a short term opportunity and contribute to the company reaching its full potential.  Since it is transactional, purchase order financing can provide a flexible and effective solution in facilitating the interim capital needs of a company.

Chip Scoggins, Business Development Manager with King Trade Capital, has almost 30 years experience in the commercial finance and banking industries.  You can reach him at cscoggins@kingtradecapital.com or 214-368-5100

www.kingtradecapital.com.

How Purchase Order Finance can help fulfill customer orders

By Bryan Ballowe, Vice President and Chief Operating Officer

How Purchase Order Finance can help fulfill customer orders

Most companies find that there’s a catch-22 to financing sales growth. On one hand, the goal of every business is to increase sales to improve their bottom line, but on the other hand, once a company lands a large profitable order many times there is an initial outlay of cash required to fulfill it. Sales growth tends to starve a company of internally generated cash flow, especially in situations where supplier credit doesn’t exist and manufacturers must be paid up front. That coupled with the fact that many companies extend payment terms to valued customers to win business results in a significant cash flow gap. If a company’s balance sheet doesn’t support a traditional loan, or supplier credit doesn’t exist, how can a company take advantage of sales growth opportunities? Purchase order finance may be the ideal solution to solve such a dilemma.

It’s important to detail some of the funding options available to companies as well as point out some of their limitations:

• Bank Financing. Bank financing is the cheapest and most recognizable form of financing to most. Traditional lenders evaluate past performance of the company including the balance sheet, income statement, and free cash flow. Traditional lenders also focus on collateral such as accounts receivable, real estate, equipment and marketable securities to name a few. This form of financing is the least expensive since the criteria is more stringent and requires the lender to be well collateralized at all times. The old adage that a bank will provide financing only when a company can prove they don’t need it holds true in this instance. What about those companies that don’t have a balance sheet to support a traditional loan? Many young companies are unable to pledge the necessary collateral to warrant a relationship with a bank. Furthermore, if a company is growing, past performance is not an accurate indicator of future performance and the loan amount a bank approves may not support the existing spike in sales that the company is so desperately trying to finance. The time to finalize a relationship with a bank can oftentimes take months and requires extensive field and collateral audits. Companies that are trying to finance growth can’t afford to wait that long – they need financing immediately.

• Asset Based Lending and/or Factoring. In many instances, this can be a very viable solution to fast growing companies. Asset based lenders lend against a pool of eligible accounts receivable and/or liquidation values of inventory. Similarly, factors purchase specific accounts receivable to provide liquidity to companies. If goods have already been delivered and/or services have been rendered and an invoice has been generated, an asset based lender or factor can provide much needed liquidity to help with a company’s cash flow needs. What happens if a company can’t get goods produced and shipped? It’s the “chicken or the egg” dilemma. In this instance an asset based lender or factor can’t help.

• Equity/Mezzanine/Tranche B Funding Alternatives. This type of funding solution may provide significant flexibility, however can be difficult to find and ultimately can be the most expensive. In order to obtain equity financing, a company must give up permanent ownership and significant operational control. Under most instances, trying to find equity takes a significant amount of time. Like equity, mezzanine debt gives the lender the ability to convert to an ownership position and can be very time consuming to find. Tranche B lenders look for enterprise value to support a “second lien” financing and require certain rights that may ultimately give them control against an existing senior lender in the event of a default. Many times existing senior lenders will not allow a company to bring on a Tranche B lender. These alternatives are better suited for longer term needs and are not really a viable solution to solve a short term spike in sales.

• Purchase Order Finance. This type of financing provides a solution to fulfill a sudden spike in sales and focuses on the direct costs needed to fulfill those orders such as cost of goods, direct labor, duty, freight and warehousing needs. Unlike the other types of financing mentioned above that focus on assets, and/or past financial performance, Purchase Order finance focuses on specific orders and what is required to fulfill those orders. Purchase Order financing does not require the company to give up ownership. It is not limited by the amount of the company’s existing accounts receivable and is an excellent solution to secure payment to a supplier that requires advance payment. Purchase Order finance does not involve a lengthy approval process and can be put in place within a matter of days under many circumstances. Purchase Order finance can also complement the position of an existing senior lender since Purchase Order financing is transactional. The orders and specific collateral supporting the Purchase Order financing can be carved out of the existing lender’s collateral.

Requirements of Purchase Order financing

While every Purchase Order financing opportunity is unique, certain requirements must exist if a company wants to work with a Purchase Order financing company. The most important requirements include the following:

• Firm, verifiable purchase orders in hand. A customer looking for Purchase Order financing must have a firm, valid order in hand. The purchase order must be verifiable with the customer issuing the order and can not reflect a guaranteed or consignment sale where payment is predicated on sale through.
• Credit worthy end customer. The purchase order must be issued by a creditworthy end customer.
• The company must be able to demonstrate that they are able to fulfill the purchase order. It’s not enough just to have a purchase order in hand from a creditworthy end customer. The company looking for Purchase Order financing must be able to demonstrate the ability to perform in order to fulfill that order. Some of the key components that a Purchase Order financing company looks for are experience, strong suppliers, quality control, and the ability to handle the logistics to fulfill deliveries on time.
• Priority interest in transaction specific collateral. In the event the company looking for Purchase Order financing help has a relationship with an existing lender, the existing lender will be asked to agree to subordinate its interests in the specific assets related to the PO financing until such time as the Purchase Order financing company is paid in full.
• Acceptable repayment terms. The Purchase Order financing company must either be paid directly from the end customer or from an advance on the resulting accounts receivable by a bank, asset based lender or factor.

How Purchase Order financing can help

When a company lands a large order or experiences a seasonal spike in orders that can’t be financed by its existing working capital, its lender or through supplier credit, Purchase Order financing is a viable solution to a short term funding need. The typical Purchase Order finance process is illustrated below:

Step 1

Company wins a large order or realizes a large seasonal spike in business

Step 2

A Purchase Order finance company is brought in and secures payment directly to specific vendors by issuing letters of credit and/or making cash payment.

Step 3

Goods are produced and shipped to the end customer(s). At that time a valid invoice is generated.

Step 4

Usually, a senior lender will advance on the resulting invoice and remit available proceeds to the Purchase Order finance company first until paid in full. Under certain situations, the end customer will make payment directly to the Purchase Order finance company.

Step 5

Once the Purchase Order finance company is paid in full, the net proceeds are remitted to the company.

The following scenarios further illustrate how Purchase Order financing can solve a short term financing need:

• A regional asset based lender has a customer that produces skin care products. The company has been in business for over 10 years and is very seasonal. They manufacture the product in their facility. Over the past two seasons, sales have been down and the customer has required the asset based lender to provide an over-advance facility to cover the working capital needs of the company through the slow times of the year. The customer suddenly realizes a large spike in business, however is in an over-advance position with its lender and also owes its suppliers money from previous shipments. The company needs financing to buy raw material and pay for direct labor to fulfill the spike in orders. Purchase order financing can be a solution to procure raw material and pay for direct labor in order to fulfill orders. Additionally, Purchase Order financing can help the company’s existing lender get out of its over-advance position.

• A factor has a potential client that imports various home accessories. The client just filed for Chapter 11 bankruptcy protection, however has experienced significant orders and requires financing to maintain its valued customers and fulfill deliveries critical to its reorganization plan. The client’s existing bank is pushing for liquidation since it is not willing to provide additional financing. With the trustee’s approval and super priority interest granted by the bankruptcy court, Purchase Order financing can provide the critical component necessary for the survival of the client.

• A company has received a large order from an overseas customer to deliver excavating equipment. The order is backed by a documentary bank letter of credit as a form of repayment. The company’s bank will not lend against the letter of credit since it is not traditional collateral and the funding need is larger than what the company’s balance sheet can support. Purchase Order financing can provide a solution by financing the purchase of equipment directly from the supplier and taking an assignment of proceeds under the bank letter of credit as direct repayment.

The Benefits of Purchase Order financing

• Provide the financing necessary to fulfill a profitable orders quickly without giving up equity.
• Enable the client to win more business and not be hindered by the lack of working capital and/or supplier credit.
• Help the client build its balance sheet through profitable sales.
• Help strengthen the client’s relationship with its suppliers by securing payment prior to goods being produced and shipped while helping to build future supplier credit.
• Help the client strengthen its existing relationship with its lender by creating more collateral and strengthen its financial condition.
• Help structure secure transactions by analyzing, executing and minimizing trade risks that exist in domestic and international trade cycles. A Purchase Order finance company has expertise in areas such as documentary letters of credit and payment against presentation of documents. This helps create a more disciplined approach to dealing with both domestic and international suppliers.
• Help banks, asset based lenders, and/or factors keep a valued client or win a client without taking on additional risk associated with over advances.

About King Trade Capital

King Trade Capital is the largest and longest-operating independent Purchase Order financing company in the country. Our team of experts has well in excess of 50 years of combined Purchase Order and/or commercial banking experience. Our Purchase Order financing provides a solution for importers, exporters, and domestic manufacturers by financing up to 100% of the cost of pre-sold inventory through letters of credit and cash payment. For more information, please visit us at www.kingtradecapital.com or call 214-368-5100.

Both Bryan and Chip have recently published informative articles about purchase order and contract finance. Bryan had an article in the April edition of the ABF Journal http://www.abfjournal-digital.com/abfjournal/201104?sub_id=gidgtVkBW41p#pg47 and Chip has articles in both the Commercial Factor winter edition https://www.factoring.org/newsletters/commercial_factor01-11.pdf (page 30) and the ACG Corporate Call March edition  http://www.acg.org/global/corporatecallapurchaseorderfinanceperspective.aspx .

Coming May 10, 2011 Bryan Ballowe is presenting an educational webinar for the Commercial Finance Association entitled:  “How Purchase Order Finance Works with a Senior Lender.” Please join Bryan and the CFA for the informative program. For further information visit:  https://www.cfa.com/eweb/DynamicPage.aspx?webcode=EventInfo&RegPath=EventRegFees&REg_evt_key=dbe75477-d8d3-4b5f-aba8-ea364ed8b2e7