There is all kinds of talk about partnerships in the market today. Generally having a partner stems from the idea that one party may have knowledge or expertise in an area the other party does not. Many times it boils down to one has money and the other does not. Maybe it is angel or venture money. Whatever it is, it always brings a new, often difficult conversation about equity.
I personally don’t like to give up equity and will do all I can to avoid it. As such, over the years, I’ve become a fan of debt financing. In the early stages of a business, and even into the long haul, that financing needs to be based on something tangible as collateral. When you buy a house or a car, the lender can simply take your house or car and theoretically be paid back for the money they loaned.
However, often times with growth, opportunities come along that stretch the capital of the business. 30% growth is generally fundable internally, but, 75% growth (putting 75% more money into inventory) may be beyond your reach. I once had an opportunity to sell a $200k initial program to Kmart and did not have the capital to buy the inventory at that quantity. We were running at inventory of about $75k, so a single buy of an additional $100k of inventory was a big leap. So, I found a lender at the time that would finance the Purchase Order using the collateral of the eventual Accounts Receivable as the back up for the loan. This practice is called Purchase Order Funding.
I asked my friend Carolyn McClure at CV Credit what some of the things were that made this type of lending productive and what were the things the Company would need to consider prior to the conversation.
First and foremost, your customers need to be credit worthy and your supply chain reliable. If the product may not perform or if your customers may not pay you, then the loan is not going to be paid back. In reality, the lender is financing your customer’s ability to pay, not yours. Financing an entire portfolio of accounts receivable is a good way to generate immediate capital while not needing to change the payment terms with your customers. In a cash flow crunch, this is productive. This practice is called Invoice Factoring.
Second, your terms need to be final. In some parts of retail, product not sold after a certain period is returned to the vendor. In that case, the lender does not want the inventory, it wants the money.
Third, you need to have your books in order. Loans come much more easily to a company that has a crystal clear understanding about margins, costs, A/R, inventory on hand value, etc. and is able to produce that information in a clear, tight financial report.
Lastly, this relationship should be put together prior to the need, based on your growing business and the possible need for short term capital to get you up the ladder. You can’t always get the extended payment terms from your vendors that you need to do business at larger and larger volumes. It is normal to find that your capital in the business continues to grow because of larger and larger levels of inventory. As you see this develop, get educated about what options you have BEFORE you give up equity just to get growth capital.
Carolyn can be reached at CMcClure@cvcredit.com or call her at (312) 804-9072
