Inventory and Purchase Order Financing in Canada

Inventory and Purchase Order Financing in Canada are two of the key elements of Asset-based lending and financing. What do Canadian business owners and financial managers need to know about this type of financing?

Inventory financing is unique – we say that simply because unless you are working with a specialized lender most financiers, bankers, etc do not understand inventory – naturally, if you don’t understand something it is difficult to lend against, which limits financing of course!

You need to work with a lender who will take the time, and already has the expertise to assess the critical element of your inventory, which is very simply what is it worth on an ongoing basis. As a business owner looking for additional working capital and cash flow, you want to maximize the amount of financing you can extract from inventory. Your inventory and receivables are huge components of your ongoing working capital needs. As we all know that government money lenders require more time for the accomplishment of the whole process, so preferably you should ask private money lender to lend you money over the least interest amount.

What are some of those key elements in inventory financing? They are as follows – first of all, you want to always ensure that you don’t enter into an inventory finance facility that requires you to store products at a third-party warehouse. That becomes cumbersome and adds some additional cost to your facility. Whilst sometimes third-party warehouses can be useful as often they have onsite equipment such as ladders and platforms which might allow you to access your products with relative ease, they can be a financial drain on companies.

When we discuss client inventory financing needs we also try to ensure they are bundled into an asset-based facility that includes accounts receivable – this certainly is not necessarily required, but simply makes the entire ‘ cash conversion cycle ‘ run more smoothly. As you know your cash conversion cycle is simply the ongoing process by which cash becomes inventory which becomes receivables which becomes cash again!

When you establish a solid inventory financing facility you simply are maximizing working capital on an ongoing basis by having pre-negotiated a maximum loan to the value of your inventory – What do we mean by this and how does it work? Well simply explained it’s putting in place a facility, which, as an example, allows you to draw down on a certain percentage of your inventory on hand. You simply provide a list of your inventory, as an example, on a monthly basis, and draw funds against that summary listing. A quick simple example – let’s say you are selling shoes to Big Box retailers, and you have 400, 00.000 shoes on hand every month to satisfy customer needs. If your inventory financing facility is margined at a pre-agreed upon 60%, (as an example) you can draw on working capital $4000.000/00X .60 = $240.000.00.

In many circumstances, we run into your firm either having no or limited inventory financing, so you have just created 240k or additional working capital for your firm.

Let’s discuss Purchase order financing also! It’s a case of drawing working capital out of orders from customers who are deemed sound. You use the funds to satisfy those orders, gain additional revenue, and increase your overall competitive presence.

P.O. Financing is a gap or bridge financing allowing you to take on larger orders/contracts… With your suppliers paid you can convert inventory into receivables and start the process all over again.

. Your suppliers are paid in advance by the p.o. financier, which frees up your working capital. Key requirements of a good P.O. Financing facility are good reputable customers, PO financing facilities of 100k and up, and your ability to demonstrate you can offer the P.O. as collateral. In some cases, insured receivables might make sense also

Not everyone knows about or understands these two types of financing; speak to an expert who has credibility and experience to maximize your use of this type of financing.