Purchase Order Financing Overview

Knowing the ends and outs of purchase order financing is an asset to almost any small or medium sized business owner. In the sections below you will learn just exactly what purchase order financing is, the benefits, drawbacks, who can benefit the most from it, and would be likely to qualify for it. What is … Continue reading “Purchase Order Financing Overview”

Knowing the ends and outs of purchase order financing is an asset to almost any small or medium sized business owner. In the sections below you will learn just exactly what purchase order financing is, the benefits, drawbacks, who can benefit the most from it, and would be likely to qualify for it.

What is purchase order financing?

Purchase order financing is another way to get a loan for the capital you need to finance the supplies, production, and shipping of a product after you have received a purchase order from a buyer. Once you produce the finished goods and are paid, you can then pay off your invoice to the company who provided you with funding.

This is a perfect solution for small start-up businesses who have orders coming in but don’t have the finances required to order supplies, pay their workers, and ship the finished goods. This would also be a great opportunity for a small to medium sized businesses who have found themselves with a sudden large customer jump or are graced with a very large order.

Who can benefit from purchase order financing?

– Purchase order financing is great for small to medium sized businesses who usually do not have the funds for large orders that could sky rocket their sales and turn their product into a household name. Image pitching your product to a major retailer, receiving an order from them, and then not being able to produce the goods needed because you are short on funds. purchase order financing could save you from this heart-breaking, and business-breaking, blow.

– A company who has received an order so large that they would need a six-digit loan. A purchase order financing company is not there to finance every single order so that a business does not have to spend any money up-front, it is merely a means for businesses to get the funds they need for an order that would otherwise be out of their reach financially.

– Only those who are reselling an already made product that they have to purchase in order to send to the buyer, such as drop shippers, or are
producing a product to sell may be eligible to receive purchase order financing.
For example, if you are selling a service, you would not qualify to receive purchase order financing. Although it may take capital you do not have to hire employees to perform the service, it would still not qualify under most company
guidelines.

What are the drawbacks of purchase order financing?

There are few drawbacks to receiving purchase order financing, however, there is one major qualification that could potentially stand in your way. When a company grants you funding, they assume they will be paid after your
customer receives the finished product and pays you. Because of this, many funding companies will check the credit of your buyer(s) to be sure that you will not get ripped off and be left without the money to pay your invoice. Purchase order financing companies are not only taking a chance on you, they are taking a chance on your customers as well. They are the ones with the real risk if the deal goes sour. Knowing that your customer is credit worthy gives the company the peace of mind to lend to you.

What to look for in a purchase order financing company

You should find a company that is right for you. These guidelines may help you better understand what type of company you should apply with:

– Find out what their minimum and maximum funding guidelines are to ensure that they meet your financial need. If a company only funds loans that are in excess of what you are looking for or has restrictions that are less than what you need then you are best moving on to another company.

– Find out what other eligibility requirements they have to
ensure that you do qualify under their guidelines before you waste any time applying for their loan.

– Find out what length of time you have to repay the loan and
check to see if it meets with you production and billing schedules to ensure that you will have the funds in time.

– Once you have found a company that works for you, make sure
that they have a fee or interest rate that your company can both afford and be comfortable with.

In the world of loans and financing, purchase order financing may be a small business’s best ally. They will usually have repayment terms that allow time for production of a product and it is the fastest way to receive financing without losing any investment in your business. Also, since they will check into the credit worthiness of your buyers, they may save you from producing a product for a deadbeat buyer. All in all, purchase order financing is a way to finance a large order that may get your product into the hands of a top notch retailer.

100% Property Development Finance in the UK

Is there such a thing as 100% Property Development Finance? The short answer is yes, however it may be useful to define what exactly we mean by property development finance and what we mean by 100% funding. Property development finance is the term used by lenders and brokers to describe the finance products employed to help property developers fund their projects. These projects can range from the simple renovation of a residential dwelling to multi-plot new-build schemes. A property developer can be an individual, partnership or company. Broadly speaking we can split property development in to three categories:

  • A property refurbishment project would involve the purchase of a residential dwelling and straight forward refurbishment of the interior. These project usually turn round very quickly as planning permission is not generally needed.
  • Property conversion projects would involve more substantial work such as an extension, conversion of an existing property into flats, or some other structural re-modelling. This type of property conversion will almost always involve planning consent, building control and sub-contractors. The developer taking on a conversion project will probably have carried property refurbishment projects in the past.
  • Top of the list is the property developer who undertakes new-build schemes. Very often a site will be purchased with either full or outline planning permission. Obviously the time scale for this type of project is much longer and the developer will probably have experience in refurbishment and conversion schemes. Lenders are increasingly insisting on some form or warranty such as the NHBC or Zurich schemes, although architects certificates are still accepted.

The challenge for the property developer is to fund the acquisition of suitable property and have enough working capital left to finance the development work. Historically banks were content to lend around 65% of the purchase price and 65% or so of the build costs. However, these options were usually reserved for experienced developers or individuals with a high net worth. As with every business cash-flow is king, and having substantial amounts of cash tied-up in a property can seriously hinder business growth.

There are now several specialist property development lenders who will consider loans far in excess of the bank solution. Most of the specialist lenders will offer loans of around 70% of the site value and 100% finance for the build costs. It is very important to understand that the development costs are paid in arrears. This means that the developer will fund the works to a pre-agreed stage where upon the lenders appointed representative (usually an independent surveyor) will carry out an inspection.

On receipt of a satisfactory report from the surveyor the funds are released and the next stage of development works can start. This type of funding usually covers “hard costs” only, so professional fees such as planning, architects fees and insurance would be paid from the developers own resources.

True 100% property development finance includes the purchase of the site, the build costs, professional fees and sometimes even interest roll-up. This type of funding is available for refurbishment projects, conversion schemes and new-builds. The developer does not necessarily need a wealth of experience as the lender will monitor and support the project quite closely. The lenders who are willing to consider 100% development funding can usually only be contacted through specialist commercial finance brokers.

To qualify for full funding the project would need to demonstrate a good profit margin and be in a geographical area known to have an buoyant property market. In essence the lender wants to reduce the risk that a loan will be outstanding for long beyond the development phase.

So, in conclusion 100% property development funding does exist, whether the developer is looking for just the build costs or full funding for the whole project. Naturally these higher levels of funding come at a premium in terms of interest rates. However this should be considered against the cost of having all the available capital tied up in a single project. The main benefit for considering 100% property development funding is the ability of look at new projects whilst completing a current project.

Commercial Finance Funding and Identifying Zombie Banks

In the world of business finance funding, the colorful terms “Zombie Banks” and “Dead Banks Walking” have been applied recently to a number of commercial lenders. Although these discussions have an element of humor and entertainment, there is a practical aspect to them as well. Ultimately it is not likely to be in the best interest of a business owner to have extensive involvement with any of the banks which these terms describe accurately. In any case it should be beneficial for commercial borrowers to understand what constitutes a zombie bank and what they should do if they are working with a dead bank walking.

For any business owner currently needing a commercial loan or working capital financing, the concept of “Dead Banks Walking” is likely to be an essential part of their decision. This description has been used by several sources recently, all with a similar reference point of banks which have already gone broke. This critical but apparently accurate assessment is largely derived from a straightforward net worth approach. Such an analysis recognizes that many banks have substantial assets which are either worthless or at least worth well below the values reflected on their books, with the resulting real current value being less than the current debts of many banks.

Based on the evaluation of many observers who have realistically reviewed current asset values, most of the largest banks in the United States been shown to be worth even less than Lehman Brothers (which is already in bankruptcy). Many banks have compounded their public relations nightmare by demonstrating very little common sense in how they make commercial loans and spend money. If a bank is already worthless, it certainly calls into question how businesses and commercial borrowers will benefit by the government throwing money at these “zombie banks” in the first place. This controversy has been fueled by the failure of most banks to increase their commercial lending to business owners after receiving government bailout funds. Banks who have received bailout funds appear to be determined to hoard the money in order to preserve their own solvency rather than providing commercial finance funding to commercial borrowers.

This raises several questions. The emerging consensus is that giving otherwise bankrupt companies (the dead banks walking) more cash does little more than cover the internal operating expenses for the zombie banks.

First, should we really believe that a bank should be “saved” simply because it is so large? There appears to be a growing majority of the public which would suggest that these banks have already lost too much good faith to ever recover in response to some arguments that the largest banks cannot be taken over even if they are already insolvent.

Second, is there a better way to solve the problem than giving insolvent banks more money? George Soros and others have recently described in detail how other banking systems have successfully handled mortgage financing. Even though residential and commercial real estate loans are thought to be at the heart of the current crisis, there is no real effort underway to revise this approach.

Third, can business owners really afford to wait for the government to solve this problem? Although waiting a few weeks or even several months might be viable for a practical solution which results in needed commercial loans, the current logjam impacting business finance funding shows little evidence of subsiding that quickly. Prudent commercial borrowers should seek alternative sources for essential working capital financing such as business cash advances. In case it is not obvious from the discussion above, dead banks walking and zombie banks can be avoided when seeking new commercial financing.