Blog articles discussing factoring companies, factoring loans, invoice factoring and all things related.
Lately, we have been running into a number of clients that are in a situation where they need credit from their supplier in order to fulfill an order and make a sale. These clients are either brand new companies with no historical financial information or established businesses that, for whatever reason, are not receiving credit from their suppliers.
Most suppliers ask for payment prior to shipment. They want their money up front before delivering the goods and often require a 50% deposit at the time of the order. While this makes reasonable sense, it often causes heartache when you have finally made that big sale and now can’t afford to fulfill it. Few things are more frustrating to a growing business!
Factoring companies have devised a way to meet these needs and it is not through invoice factoring in every case. Besides, if you don’t have accounts receivable, you can’t factor your invoices and receive money to fulfill orders.
How have factoring companies done this? The answer is a clever way that gives the lender comfort, the clients sales and requires some cooperation from the supplier. The secret is through a Vendor Assurance or Tri-Party Arrangement with the supplier.
For example, we are now talking to a start up company in the oil and gas industry. While the owners have experience in the industry with great customer contacts and supplier relations, they do not currently have any sales. This rules out invoice factoring or any other account receivable based financing for that matter.
What they do have is a firm purchase order from a financially solid customer. If they are able to fulfill this order, they are assured that more will be behind it. When I say a “firm” purchase order, I mean and order that will result in $1,600,000 in sales for the company! However, the anxiety comes in when they realize that they will have to pay their supplier approximately $800,000 to process the order.
So, how do I get credit from my suppliers? Let’s get back to the Vendor Assurance.
A Vendor Assurance or Tri-Party Agreement is an agreement between the supplier, the company requesting credit and the lender. It is a 3-4 page legal document that guarantees payment to the supplier. This is provided that the goods are received by the customer without dispute.
The benefits to the supplier are that they are guaranteed payment if the goods are delivered as agreed, they can safely extend terms to their customers and increase their sales, and they have the assurance from the lender that they will be paid. The benefits to our clients are that they now have access to the goods they need to fulfill the order and they do not have to cover the cost upfront. This is huge! The old expression that “cash is king” is true, but where cash isn’t possible this credit might be.
Factoring companies like this because they are shifting the risk of payment to the supplier by not having to extend hard capital to fulfill an order. By financing the cost of goods at the time of receipt by the end user, they are effectively using invoice factoring to fund the working capital need.
Of course, all of this is reliant on the suppliers cooperation, but you would be surprised how many suppliers we talk to that are open to it. Most see that extending credit to their customer will benefit them in the form of increased sales too. If the supplier is on board with it, everybody wins.
If your business could use some creative financing to grow, give us a call. We provide unbiased consultation and a menu of options to choose from when selecting the right lender for your business.
To your success!
Patrick Zazueta | Founder | Huntington Coast Capital, Inc. | 714-719-8966