Growth in a Down Market: Purchase Order Finance Grows Companies

Sunday, May 1, 2011

Growth in a Down Market:
Purchase Order Finance Grows Companies
By Edward King 

(originally published in January/February 2011 The Secured Lender: )

                 As we look back on the gradual economic recovery in 2010 some businesses were able to not only survive, but thrive, through the recession and into the recovery. Read on for an explanation of how traditional lenders can utilize purchase order financing to ensure that client companies (and their senior lenders) will be profitable in the coming year and beyond. In spite of the harsh economic climate, sales for some companies grew in 2010 even as banks and other traditional lenders scaled back lending. What sets them apart? Often, it’s their relationship with a purchase order finance company. 
                  In simple terms, purchase order financing can provide up to 100% of the capital needed to manufacture or acquire inventory in order to fulfill purchase orders. This allows businesses to grow when they have profitable sales opportunities but do not have the balance sheets to support traditional inventory financing. Generally, a company simply needs solid purchase orders from creditworthy buyers, and it must have the ability to perform and deliver the inventory if provided the proper capital. The client’s balance sheet is not necessarily a determining factor. 
                 Purchase order finance affords companies the option either to manufacture goods or purchase the inventory to fulfill orders, and it focuses on the end buyer’s credit as the ultimate support for a transaction. Thus, no longer is a company with good sales opportunities constrained by difficult senior lender requirements involving raising more equity or a flat-out “no” for an answer. 

Surviving the perfect storm 
                 After the “perfect storm” of uninterrupted growth fueled by more than a decade of excess liquidity came to a rapid end, credit contracted in a manner not seen since the Great Depression. The last several years have brought undeniably difficult economic circumstances to many American companies and their employees, but some have managed to navigate their way through it and come out on top because they financed their businesses and sales with purchase order financing. 
                 Thankfully, the economy is now rebounding from the deep, fast contraction, and the improvement is most evident in those businesses that were able to finance the round of inventory restocking that started earlier this year. For well-financed companies, this restocking has helped sales return to more consistent levels. Now that the economy is more stable, those well-financed companies are also in a position to capture additional market share from weaker competitors that did not make it through the recession or do not have suitable financing to grow as sales pick up. 
                 Undercapitalized or underfinance businesses are slipping further and further away from their chance to grow back to health. The recovery is a slow, jobless one and is coupled with a constrained credit environment, which continues to make it difficult for companies to prosper. Many companies that were profitable for years have become undercapitalized, forcing them to shift their focus to holding their staff and facilities together with whatever capital they had for payroll and other obligations, thus depleting the very resources needed to grow when the economy improved. 
                 Now that many companies are seeing customers return, however, order backlogs are occurring for the first time in several years. On the surface, this is a welcome turn of events, but unfortunately, after scaling back and having much smaller balance sheets, these companies are not positioned to produce or deliver like they could a few years ago. Faced with the prospect of year-overyear sales growth and additional market share, those companies need to be able to finance inventory in order to handle the growing backlog. 
                 Purchase order finance is an excellent solution to finance the new growth, because, as business owners and operators look at the future, they are seeing an improved outlook with sales opportunities growing; however, they run headlong into a constrained lending environment. That, coupled with the fact that their balance sheets have become smaller and many senior lenders are either capping their exposure or have grown fatigued with customers after enduring several years of losses, places these businesses in a difficult situation. How does a company take advantage of the growth opportunities presented now in order to grow their business back to health? One of the most viable ways that many have found to capture this growth for their future expansion is to utilize purchase order finance. 
                 Purchase order finance offers a solution that allows a business the chance to grow when they have profitable sales opportunities, but do not have the balance sheet to support traditional financing of inventory to fill the orders. The main tenets of purchase order finance are that a company needs solid purchase orders from creditworthy end buyers and the client must have the ability to perform and deliver the inventory if provided the proper capital. The client’s own balance sheet is not necessarily a determining factor. 
                 Purchase order finance offers the undercapitalized companies, that are presented with the opportunity to expand sales, the ability to buy or manufacture inventory to make the sales. No longer is a company with good sales opportunities constrained by a senior lender with difficult requirements involving raising more equity or a flat-out “no” for an answer. 
                 Purchase order finance affords companies the option to either manufacture goods or purchase the inventory required to fulfill these growing orders even if that company’s balance sheet does not support the additional financing. A purchase order finance company focuses on the end buyer’s credit as the ultimate support for a transaction that it would finance. 
                 When a business is growing or emerging from a financial downturn, its future sales tend to be much more substantial than its past sales. Banks and other senior lenders, however, rely on the current balance sheet and past sales data to qualify a loan. Their hands are, thus, often tied and they are unable to assist companies to obtain the additional capital that is so imperative for a growing business with a balance sheet that is smaller than the opportunities. A financially sound purchase order finance company, on the other hand, will look at the sales opportunities and structure a finance solution to take the performance risk that a traditional lender will not or cannot take without balance sheet support. 

A winning combination 
                 Many senior lenders across the country, whether bank, asset-based lender or factor, find that working with a financially sound purchase-order finance company enables them to retain and assist their clients by offering a unique solution in the event that their customers’ growth exceeds the borrowing capacity of their balance sheets. The purchase order finance company is able to help without forcing the senior lender to take on additional risk or requiring the customer to sell or add equity in a difficult capital environment, thus meeting the goals of both the customer and the senior lender during tough economic times. 
                 Although purchase order finance is a boon to companies during tough economic times, it is a tool that is definitely not limited to helping only in a down economy, but rather a means of augmenting the development of businesses of all sizes during good times as well. For instance, purchase order financing can provide capital needed for inventory that is presold under purchase orders and contracts. This facilitates the company’s growth when opportunities arise, and it allows companies to groom their balance sheets for future loans from traditional lenders. 
                 Purchase order finance is intended to be a complement for companies that currently have senior lenders. A PO finance company will work in conjunction with the senior lender to ramp up a company’s sales and thus their balance sheet. By financing the inventory and making certain it is delivered — and ultimately converted into accounts receivable — a purchase order finance company assumes the risk (instead of the senior lender), and the senior lender maintains its relationship with the client. 
                 The purchase order finance company plays an integral part in making sure the sales are completed and the receivable is created. Once inventory is delivered or shipped, senior lenders often then advance upon the new accounts receivables and retire all or a portion of the purchase order financing. The client makes profitable sales and grows its balance sheet, which, in turn helps the senior lender provide more financing. 
                 The relationship of a purchase order finance company with the client and the senior lender is really a winning combination for all parties involved. Purchase order finance allows unencumbered growth for almost any business that needs to fulfill profitable orders, but that is not able to find traditional means to finance that growth. This especially helps companies that do not want to (or are not able to) sell equity in order to build their balance sheet so that they can acquire the inventory to fulfill orders to grow the business. 
                 Thus, regardless of the economic climate, purchase order finance effectively offers solutions that allow businesses to capitalize on opportunities.

Edward King is the founder and managing partner of King Trade Capital, the largest independent provider of purchase order finance in the United States. The specialized investment firm’s clients have included more than 250 public and private companies worldwide in which King Trade Capital has invested more than $1 billion of capital.

You can contact King Trade Capital at 214-368-5100 or at

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