While searching for solutions and exploring options to grow a business, there are some alternative options to consider.
1. Purchase Order Financing is mainly for resalable and finished goods with very little repackaging required to deliver. The supplier is paid directly usually with a Letter of Credit. This option works when larger orders come in and a company needs the capital up front to finance the transaction. The profit margins need to be higher for this type of financing because the lender has more risk and will advance less of the purchase order to cover any offsets. Generally speaking the purchase order gross margin will need to be 20- 30% to make this option work. It’s done on a transaction by transaction basis and the receivables may need to be factored to pay out the purchase order faster.
2. Inventory Financing, floor planning or Vendor finance program is used for retailers who buy inventory in the marine, electronics, recreational vehicles, lawn and garden and appliance sectors to name a few. Everything from construction and agricultural equipment can be financed this way.
Non retail businesses will find inventory financing useful when experiencing seasonal fluctuations in sales or when they need to pay suppliers for product on shorter terms than they can cash flow with their receivables. This tends to be viewed as riskier and the advances can be as low as 25-30% of the inventory value. Inventory financing is often wrapped up with other financial services.
3. Leasing is a good way to maximize your company credit when buying large equipment or office equipment. When you lease equipment it helps to maximise the amount of credit available to the company by separating the asset from other liens. Leasing can help you get the best equipment possible for the job paid over time and with some tax benefits to boot. This financing doesn’t affect your debt to equity ratios and your monthly payments come from your operating budget. You will pay more for a piece of equipment over time but with less strain on your cash flow. Make sure you take the time to understand what your interest cost is and don’t just focus on the size of your monthly payment.