WHEN BANKS SAY

1

• WHEN BANKS SAYNO!THE SMALL BUSINESS
  GUIDETOFACTORING

2
ENTREPRENEURIAL FINANCE

• Much has been written about entrepreneurs and
  their unique characteristics. A common fallacy
  regarding small business entrepreneurs is that
  they are driven to build immense empires.
  That is generally not the case.

3
ENTREPRENEURIAL FINANCE

• The fact is, most true entrepreneurs start their
  businesses simply to generate a "living" and a
  steady stream of income. As true entrepreneurs,
  however, they must also be their own person, make
  their own decisions, and the business must run
  their way.Among their many characteristics,
  entrepreneurs.....

4
ENTREPRENEURS

• are risk takers and believe in themselves,
  their ideas, and their hunches. True
  entrepreneurs seldom give up and will never
  quit seeking a successful venture. are
  competitive and strive to earn respect from
  both customers and competitors. They compete
  with themselves and believe they control
  their own destiny.

5
ENTREPRENEURS

• tend to be loners and thinkers who are often
  attracted to home-based businesses. They spend
  serious amounts of "alone time" analyzing
  problems and theorizing solutions and are
  always thinking up new ideas for beginning
  somenew venture.
•  

6
ENTREPRENEURS

• are goal oriented and once a goal is
  achieved, they may well replace it with an
  even loftier goal.
• are multi-taskers. Once a new idea is
  envisioned, they will then quickly develop a
  sense of urgency towards its fruition.
•  

7
ENTREPRENEURS

• tend to have a never ending sense of
  urgency to develop their new ideas. In fact,
  it is most often only their inability to
  finance their many ideas and projects that
  truly limits an entrepreneur's potential
  for success.
•  

8
ENTREPRENEURIAL FINANCE

• This presentation and its accompanying booklet,
  When Banks Say No!, is designed to assist small
  business entrepreneurs in understanding the world
  of Early Stage Financing Alternatives and in
  particular...
• commercial accounts factoring asset based
  lending purchase order finance
•  

9
WHAT IS SMALL BUSINESS?

• The U.S. Office of Advocacy defines a small
  business as an independent for-profit business
  with fewer than 500 employees. When attempting
  to qualify for government contracts, the U.S.
  Small Business Administration furthers that
  definition by defining size requirements by
  business type. The complete listing is available
  at www.sba.gov/size.

10
SMALL BUSINESS NUMBERS

• According to the most recent census data, the
  U.S. Department of Commerce estimates there were
  27.2 million businesses in the United States of
  which 6 million had employees. Of those with
  employees, 99.9 were defined as "small business"
  (those firms with fewer than 500 employees).

11
NEED FOR FINANCE

• Unfortunately, data also reveals that one third
  of all these small businesses started end up
  failing within the first two years of operation
  and less than 50 survive four years. One of the
  greatest causes of small business failure is
  their inability to secure adequate financing in
  their early stages of existence.

12
ENGINE OF GROWTH

• Throughout the world, small business is
  recognized as the true engine of economic growth.
  According to the U.S. Small Business
  Administration (SBA), small business ventures
  make up nearly 99 of all known businesses in
  America with numbers now totaling over 22
  million.

13
STARTUP FINANCING

• Most small business ventures are initially
  launched with the personal savings or other
  assets of the founder. Sources of startup
  capital are most often bank savings accounts,
  investment accounts (stocks and bonds), loans
  collateralized by the family home or other real
  estate, credit cards, or personal loans from
  friends and family.

14
STARTUP FINANCING

• Few new companies are ever started with funds
  from true "angel investors" or formal venture
  capital.
• Typically, entrepreneurs will actually be faced
  with the task of raising capital in two generic
  rounds, with...

15
RAISING CAPITAL

• round "A" being an initial start up round
  where savings and funds from friends and
  family are utilized. And...
•  
• round "B" being more traditional
  financing from banks and more formalized
  lenders.
•  

16
RAISING CAPITAL

• While the understanding of rounds "A" and "B"
  financing is acceptable, it paints the true
  picture of entrepreneurial finance with a much
  too simplistic brush. For a better understanding
  of the actual stages associated with types of
  business finance, the definitions commonly
  utilized in the professional venture capital
  industry are much more appropriate. Among these
  are

17
STAGES OF FINANCE

• Seed the concept or idea stage of a
  business where money is needed to research
  feasibility.  
• Startup financing prior to initial
  operation.
•  
•  

18
STAGES OF FINANCE

• First Stage an operating business with
  capital needs for equipment, payroll, and
  marketing. Second Stage growth capital now
  required with good First Stage results.
•  
• Bridge temporary financing between other
  financing rounds.

19
STAGES OF FINANCE

• Mezzanine equity financing that is prior to
  an initial public offering (IPO).
• Franchise Funding financing for the
  purchase of a franchise.
• Leveraged Buyout financing to purchase
  another established company using the
  combined assets for purchase. 

20
STAGES OF FINANCE

• Recapitalization financing revolving
  around the restructuring of a company's
  balance sheet and increasing or decreasing
  the company's debt.
•  
• Bankruptcy financing to acquire another
  company operating under a filing of
  bankruptcy in Federal Court

21
DEBT vs. EQUITY FINANCING

• In order to grow their businesses, it is crucial
  for all entrepreneurs to have access to "ready"
  capital. Commercial banks and other depository
  institutions have historically been the largest
  providers of financing for small business,
  accounting for approximately 65 of all financing
  through commercial loans (including those for
  non-residential mortgages, vehicles, equipment,
  and leases).

22
DEBT vs. EQUITY FINANCING

• Though a variety of resources for commercial
  financing are available worldwide, actual
  providers of business capital can be broken down
  into two very broad categories. Those that
  provide equity investment alternatives, and those
  that financing through debt.

23
EQUITY FINANCING

• Equity Financing...can be described as the
  exchange of money for a percentage of ownership
  in a business. Equity financing allows a
  business owner to acquire funds without the
  expense of servicing debt. It typically does not
  encumber assets such as equipment, inventory, and
  accounts receivable and is normally accessed
  through venture capital companies.

24
DEBT FINANCING

• Debt Financing...refers to borrowed money that is
  paid back over time. Debt financing is flexible
  and can be for varied periods of time (short term
  or long term). The lender does not gain an
  ownership interest and the obligation of the
  business owner is simply to repay the loan as set
  forth in the lending agreement.
•  

25
DEBT vs. EQUITY

• Debt and equity financing offer significantly
  different opportunities / responsibilities when
  raising capital. Some of the many advantages
  and disadvantages of both methods include
•  

26
DEBT FINANCING

• Does not dilute an owner's interest in the
  company.
• Other than variable rate loans, repayment
  is fixed.
• Interest expense is deductible on tax
  returns.
• No shareholder servicing requirements.
•  

27
EQUITY FINANCING

• Requires no periodic payment of interest.
• Will not affect a company's cash flow.
• Does not encumber assets.
• Does not require budgeting for principal
  repayment.
•  

28
ACCESS to FINANCING

• A common source of frustration to virtually all
  small business entrepreneurs is their inability
  to access credit through the traditional banking
  system as they attempt to grow their businesses.
  Banks and traditional lenders are severely
  regulated and covenant restricted when attempting
  to provide truly accessible financing and small
  business loans to startup entrepreneurs.

29
ACCESS to FINANCING

• For most small business entrepreneurs, it is when
  their business is initially successful through
  its start up and first stage operation that the
  entrepreneur is confronted with his/her first
  cash flow problems. It is at this stage that the
  initial cash grub stake from savings, credit
  cards, and friends and family is "burned
  through" and immediate additional financing
  becomes necessary.

30
ACCESS to FINANCING

• This is also when an understanding of the many
  financing options offered by such federal
  agencies as the Small Business Administration and
  the United States Export-Import Bank become
  highly important and when an in-depth
  understanding of the alternative commercial
  finance (ACF) industry may become critical.

31
The SBA and EX-IM BANK

• The U.S. Small Business Administration (SBA) and
  the Export-Import Bank of the United States
  (Ex-Im Bank) are two independent federal agencies
  with powerful financing options for small
  business entrepreneurs. The SBA was created in
  1953 for the purpose of aiding, counseling,
  assisting, and protecting the interest of small
  business concerns and free enterprise.

32
The SBA and EX-IM BANK

• Export-Import Bank of the Unites States was
  empowered in 1934 as the official export credit
  agency of America. Both government agencies
  provide extensive financial services to small
  and mid-size businesseswith a broad range of
  programs.

33
FACTORING and ACF

• The global community of factoring and alternative
  commercial finance providers offer an extensive
  and powerful source of financing options for
  start up / first stage companies struggling in
  their early, formative years of operation as well
  as larger, seasoned companies in the various
  growth, expansion and operational stages of their
  existence.

34
FACTORING and ACF

• The spectrum of factoring and ACF products
  directly addresses the problems faced by those
  entrepreneurs which, for a variety of reasons,
  are unable to access traditional bank financing
  and lines of credit and the early stage capital
  required to grow their ventures.

35
ALTERNATIVE COMMERCIAL FINANCE

• Worldwide, there are literally dozens of unique
  financial product areas that join to make up the
  entirety of what is termed the alternative
  commercial finance community with some being more
  favorable than others in particular economies and
  geographic regions.

36
ALTERNATIVE COMMERCIAL FINANCE

• For their ability to provide ready access of
  capital to entrepreneurs and to generally meet
  the working capital and cash flow problems of
  start up and early stage small business, several
  areas clearly stand out among the rest. These
  areas include...
•  

37
FACTORING

• Commercial Factoring...one of the oldest known
  forms of commercial finance, factoring is also
  characterized by its simplicity. It directly
  addresses those cash flow problems associated
  with accounts receivable of a business, slow
  paying customers upon those accounts, and the
  granting of terms of payment to customers in
  order to become more competitive and to secure
  more business.

38
ASSET-BASED LENDING

• Asset-Based Lending...similar to factoring in
  some ways, asset-based lending solutions can be
  employed in a multitude of industries where
  financing of accounts receivable, inventories,
  and equipment is essential for growth.

39
PURCHASE ORDER FINANCE

• Purchase Order Finance...simply put, purchase
  order finance involves the process of providing
  capital to business owners needing to purchase
  or to actually manufacture goods to fill large
  orders prior to shipment. It is often necessary
  to facilitate handling transactions involving
  major retailers.

40
MERCHANT CASH ADVANCES

• Merchant Cash Advances...a relatively new area of
  small business finance but with broad
  availability, MCAs provide cash advances on
  future, anticipated credit card receipts of
  retailers which can be used forgrowth and
  expansion.

41
BANKS vs. ACF

• For entrepreneurs in the early high-growth period
  of developing their business, ACF offers some
  significant advantages to traditional financing.
  One such advantage is the ability to finance
  each asset of a company separately. When banks
  provide financing, they will typically require
  all assets of the company as collateral and file
  a "blanket lien" when perfecting their loan.

42
BANKS vs. ACF

• With such a blanket lien filing, the single loan
  will be secured (collateralized) by inventory,
  accounts receivable, machinery, equipment,
  patents, rents, and any other asset of the
  company. In such cases, bank loans are often
  significantly over collateralized.
• With ACF, collateral is typically taken
  separately.
•  

43
ACF EVOLUTION

• Alternative commercial finance is a community
  rich in history and legend. Factoring, for
  example, may well be the oldest form of
  commercial finance known to man though most know
  little of its extensive history and remarkable
  problem solving capabilities when compared to
  more traditional business financing methods.

44
ACF EVOLUTION

• Factoring is literally centuries older
  thanmodern day banking and some of history's
  earliest recorded commercial transactions of
  both the ancient Egyptians and Phoenicians
  reference features similar to modern day
  factoring.

45
ACF EVOLUTION

• Asset-Based Lending's earliest beginnings can be
  traced to a pair of encyclopedia salesman, Arthur
  Jones and John Little who started the first
  finance company, Mercantile Credit Company, in
  1904 which offered accounts receivable financing.
  Asset-based lending has grown steadily since and
  now accounts for over 20 of all short term
  business credit in the U.S.

46
TODAYS ACF INDUSTRY

• Overall, today's alternative commercial finance
  industry is enormous with asset-based lending
  transactions alone accounting for over 545
  billion in terms of outstanding loans annually.
  Factoring, known affectionately as the industry's
  "crown jewel", has grown to an annual volume of
  roughly 135 billion domestically.

47
TODAYS ACF INDUSTRY

• But as far as factoring is concerned, that is
  only the tip of the iceberg. Recent statistics
  compiled by the international factoring
  organization, Factors Chain International, quotes
  total global factoring now reaching an epic
  annual volume of nearly 1.3 trillion.

48
TODAYS ACF INDUSTRY

• Other areas are expanding just as rapidly.
  According to ELFA, the Equipment Leasing and
  Finance Association, the 650 billion leasing
  industry is adding nearly 6 billion in new
  equipment leases every month.

49
TODAYS ACF INDUSTRY

• When you additionally begin to include the many
  unique niche product areas such as forfaiting,
  purchase order finance, merchant cash advances,
  etc., the overall dollar volume of specialized,
  non-traditional bank financing done throughout
  the world is many trillions of dollars each and
  every year.

50
ACCESSING ACF

• While many of the product areas, associated with
  the alternative commercial finance industry are
  well established throughout the world, some are
  relatively new. What has changed markedly in the
  past 10-15 years is the broad access to
  knowledge of alternative commercial finance
  products. This has occurred primarily due to two
  major influences

51
ACCESS TO ACF

• The Internet....without question, the
  information superhighway now offers and imparts a
  broad array of knowledge to those who know where
  to look.
•  
• Industry Brokers....a unique vocation
  practiced by a select group of individuals that
  share their industry knowledge with small
  business entrepreneurs.

52
THIS PRESENTATION

• With such an expansive and rich array of industry
  product areas, it is clearly well beyond the
  scope of any basic presentation (or most
  university courses for that matter) to provide a
  complete education in all of the fascinating
  areas of entrepreneurial and alternative
  commercial finance practiced throughout the
  world.

53
THIS PRESENTATION

• The objective of this booklet, When Banks Say
  NO...the Small Business Guide to Factoring, is to
  impart an introductory knowledge of two of the
  most practiced and accessible areas of
  alternative commercial finance available to small
  and mid-size early stage business
  entrepreneurs....Factoring and Purchase Order
  Finance.

54
ENTREPRENEURIAL FINANCE

• FACTORING

55
FACTORING

• In simple terms, factoring or accounts receivable
  factoring is the sale of the accounts receivable
  of a business at a discount to a finance company
  known as the factor. Factoring is commonly
  employed by businesses that grant extended terms
  of payment to their customers for goods or
  services purchased, allowing those customers to
  delay payment upon invoices for 30, 45, 60 days
  or longer.

56
FACTORING

• Factoring is commonly employed by businesses that
  grant extended terms of payment to their
  customers for goods or services purchased,
  allowing those customers to delay payment upon
  invoices for 30, 45, 60 days or longer. It is
  probably the oldest form of commercial finance
  known to man.

57
FACTORING

• It is important to keep in mind as you develop
  your knowledge of this powerful financial tool,
  factoring differs dramatically from most other
  forms of commercial finance in that true
  factoring is never in the form of a loan.
  Factors actually purchase the accounts receivable
  of a business, a trait that sometimes gives
  factors certain advantages over more common
  commercial lenders.

58
FACTORING

• For entrepreneurs in the early stages of
  developing their businesses, factoring represents
  one of the most powerful financial tools
  available. Factoring... is available to
  businesses in the earliest "start up" stage
  of their existence. requires little or no
  credit history for either the business or its
  owner.
•  

59
FACTORING

• provides a financing facility that
  automatically increases as your business
  grows.
• provides substantial operational support in
  addition to providing capital.
• allows other business assets to be
  financed separately from accounts receivable.
  
•  

60
FACTORING

• Most factoring arrangements are sought out simply
  to provide a readily accessible method of
  financing a companys terms of payment policy and
  to remedy the cash-flow problems a business often
  experiences by granting such attractive terms of
  payment to its customers.
•  

61
FACTORING

• At some point in time, as companies grow, they
  are almost required to initiate a terms of
  payment policy. Terms of payment are granted by
  sellers as an accommodation for a singular
  purposethat is to attract more purchases from
  large (and sometimes not so large) creditworthy
  customers.
•  

62
FACTORING

• Many large, creditworthy customers, on the other
  hand, demand terms of payment for a singular
  purpose..that is to benefit from the payment
  delay provided under the terms of payment policy
  and to allow time to sell products or provide
  their own services and to generate enough
  additional cash to subsequently pay their
  supplier's invoice within the normal payment
  terms.  

63
FACTORING

• For large corporations, the benefits of demanding
  extended terms of payment from vendors are very
  significant. When one business grants terms of
  payment to another, it is in effect, creating a
  short-term non-interest bearing business loan to
  that company. (See example page 18)
•  

64
FACTORING

• Because of the attractiveness to large companies
  of delayed invoice payments, it is not unusual
  to see contracts and large purchase orders
  granted to those vendors and suppliers that offer
  the most attractive payment terms, even if the
  prices for goods or services are slightly higher
  than from competitors.  

65
TRANSACTIONAL BASICS

• In a typical factoring transaction, a business
  owner (known as the client) will enter into a
  relationship with a commercial financing source
  (the factor) to which it periodically sells its
  invoices payable by its customers. In most
  modern factoring transactions, the invoices are
  initially purchased by the factor with an advance
  of cash (usually 75-85 of the invoice face
  value). 

66
TRANSACTIONAL BASICS

• By periodically purchasing a business's invoices,
  the factor provides immediate working capital for
  normal operations including timely payment of
  its bills due to suppliers and its periodic
  payroll obligations.
•  

67
FACTORING BENEFITS

• With a factoring arrangement in place, the
  customers of the seller still get to enjoy their
  30, 45 or even 60 day credit terms while the
  factor, not the seller, patiently waits for the
  agreed payment. The factor will make collection
  calls on behalf of the seller, provide weekly
  accounting of all collections and fees charged,
  and provide monthly statements of account to the
  seller's customers.

68
FACTORING BNEFITS

• When payments upon purchased invoices are
  ultimately received from the customers, the
  factor deducts its fee for services (the
  factoring fee), repays itself for the earlier
  advance, and then rebates the balance to the
  seller (client). In most modern factoring
  arrangements, clients will sell their invoices to
  the factor on at least a weekly basis but
  sometimes as often as daily.  

69
FACTORING BENEFITS

• Though the circumstances that can trigger the
  critical need for a factoring arrangement can
  vary considerably, the common thread is always a
  need to speed up the payment from invoiced sales
  so the cash can be used for some immediate
  purpose. Such needs typically include

70
FACTORING BENEFITS

• making timely payroll.
• paying suppliers for parts or merchandise
  early to obtain volume discounts.
• paying overdue tax obligations.
• purchasing machinery and equipment.
•  

71
FACTORING BENEFITS

• funding retirement plans and programs.
• providing funds for acquisitions or
  expansion.
• increasing sales and marketing operations.
• buying out business partners.
•  
•  

72
FACTORING BENEFITS

• The list of reasons for establishing a factoring
  arrangement go on and on. In most cases, the
  need for factoring is the result of the inability
  of a business to access bank lines of credit, a
  trait that is of even greater importance in
  today's credit impaired markets. It is no
  surprise that factoring is enjoying an increasing
  awareness by business owners today as more
  traditional methods of business finance prove
  difficult to obtain.

73
FACTORING TRANSACTION CHARACTERISTICS

• Business-to-Business Invoiced Sales As a
  method of providing commercial finance, factoring
  only involves the purchase of invoices due for
  payment for goods delivered and for services
  performed on a business-to-business basis.
  Factors are not lenders and do not loan money
  regardless of collateral. 

74
FACTORING TRANSACTION CHARACTERISTICS

• Ability to Verify Invoiced Amounts Due
• Unlike banks that may lend against hard assets
  such as real estate and equipment, factors
  purchase a piece of paper (an invoice). Such
  invoices clearly must be verifiable.
•  

75
FACTORING TRANSACTION CHARACTERISTICS

• Unencumbered Invoices for Purchase
• Invoices purchased by a factor must be
  unencumbered. This means that the business owner
  selling the invoices cannot have a pre-existing
  loan from a bank or other lender that claims the
  invoices (accounts) as collateral for that loan.
• If such a pre-existing loan exists, the lender
  will be required to subordinate the collateral
  position.

76
FACTORING TRANSACTION CHARACTERISTICS

• Assignable Invoices
• Factors require the ability to "notice" the
  customers of a client and to redirect payments
  from the client's address to that of the factor.
  While this is not an issue in most cases, some
  debtors, such as the Federal government, may
  refuse to pay the factor directly and will not
  recognize such notification, thus adding a level
  of risk that may be unacceptable to the factor.

77
FACTORING TRANSACTION CHARACTERISTICS

• Acceptable Profit Margins From Sales Factors
  will look at the profit margin of a prospective
  client to make certain that enough profit exists
  to absorb the overall costs of factoring.
  Companies with15 profit margins or higher can
  easily absorb the fees of a factor.

78
FACTORING TRANSACTION CHARACTERISTICS

• Federal Tax Liens Prospective factoring clients
  must have their payroll and corporate taxes
  current and cannot have a federal tax lien for
  delinquency in place. It is important to note
  however, factoring can be an important tool in
  dealing with tax liens, freeing up cash from
  invoices which can be used to satisfy liens In
  some cases.

79
FACTORING TRANSACTION CHARACTERISTICS

• Continuous Need /Ongoing Basis
• As a prospective client for factoring, the
  business should exhibit a need for the service on
  an ongoing basis. Those entrepreneurs that only
  need additional working capital on an occasional
  or one time basis will find it much more
  difficult to interest a factor in accepting the
  arrangement.

80
ELIGIBLE INVOICES

• For purposes of financing, factors and lenders
  will purchase normal trade invoices reflecting
  sales "without condition". Certain types of
  invoices and / or conditions of sale can
  disqualify invoices from factoring or other forms
  of accounts finance. Some of the most common of
  these characteristics include
•  

81
ELIGIBLE INVOICES

• Over 90-day receivables Consignment
  invoices Invoices Subject to Lien
  Contras Government / Foreign Accounts
  Bill and Hold Inter-Company Receivables
  Contingent Invoices Poor Credit Quality 

82
FACTORING CASE STUDIES

• Case Studies One of the best methods of
  understanding factoring is sometimes through
  examples or "Case Studies". See page 28.
•  
•  

83
FACTORING FEES

• Fees Charged in Factoring
• Fees charged for factoring are usually
  calculated per period of time that the invoice
  remains outstanding and unpaid. Such periods are
  referred to as "windows" and are frequently
  either 10 or 15 days. Factoring fees have
  dropped markedly over the last twenty years with
  a typical 30 day factoring rate now being about
  the same as a credit card transaction (2-3).
  See page 32

84
INTERNATIONAL FACTORING

• INTERNATIONAL FACTORING
• As international trade continues to grow, so do
  the opportunities for international factoring or
  import-export factoring. It is becoming well
  established in many developing nations
  (especially those that are highly industrialized)
  and is often considered the financing method of
  choice for export trade between the United States
  and Europe.
•  

85
INTERNATIONAL FACTORING

• There are four parties involved in an
  import-export factoring transaction
•  
• ? the exporter ? the importer ? the
  export factor ? the import factor
•   

86
INTERNATIONAL FACTORING

• In most typical international factoring
  transactions, the export factor will be located
  in the same country as the exporter of goods and
  the import factor will be located in the same
  country as the importer of goods. The exporter
  will work with the export factor who has a
  relationship with the import factor. Usually,
  both will be members of Factors-Chain
  International  

87
ENTREPRENEURIAL FINANCE

• PURCHASE ORDER FINANCE

88
PURCHASE ORDER FINANCE

• Purchase Order Finance (PO Finance) is a
  powerful financial tool commonly offered through
  factors and asset-based lenders. Though its
  capabilities are not limited to export-import
  trade, its use is so common in cross-border
  transactions that virtually any entrepreneur with
  international commerce in mind should become
  familiar with its capabilities. 

89
PURCHASE ORDER FINANCE

• Simply put, purchase order finance answers the
  needs of manufacturers and distributors when
  capital is necessary to fulfill an order.
  Whereas factoring is brought to bear after the
  delivery of merchandise or performance of a
  service, purchase order finance provides the
  necessary capital to manufacture the goods prior
  to delivery and invoicing.
•  

90
PURCHASE ORDER FINANCE

• Successful purchase order finance is based on
  three criteria a valid order from a
  creditworthy customer
• performance capability of the client is it
  a "firm" purchase order?
•  

91
PURCHASE ORDER FINANCE

• Purchase order finance is primarily utilized by
  two types of companies... distributors and
  manufacturers. It is generally not available for
  the service sector. As a rule, distributors do
  not manufacture or assemble their product
  although many intoday's markets are "contract
  manufacturers" and arrange for the manufacturing
  of a product overseas
•  

92
PURCHASE ORDER FINANCE

• Purchase order finance companies work directly
  with factors and asset-based lenders. Once an
  order is filled and delivered to the customer,
  the customer is invoiced by the client and an
  account receivable is created. At this point,
  the purchase order finance company must be
  "taken out" by the factor or lender.
•  

93
PURCHASE ORDER FINANCE

• As a general rule, most purchase order finance
  companies dislike working directly with lenders
  such as banks, much preferring the flexibility
  of the factors and asset-based community.
•  

94
PURCHASE ORDER FINANCE

• As mentioned, one of the most common transactions
  requiring purchase order finance is that of
  offshore contract manufacturing. When a foreign
  factory, for example, manufactures a product for
  a domestic company, they generally require full
  payment when the goods are delivered to the
  freight forwarder.
•  

95
PURCHASE ORDER FINANCE

• To accommodate the foreign factory, the domestic
  manufacturer will contact a purchase order
  finance company to
• A. post a letter of credit for payment
• B. inspect the goods
• C. pay for the goods when required
• D. arrange for shipment to the
  customer
•   

96
PURCHASE ORDER FINANCE

• Once the goods are delivered to the client's
  customer, invoices can be generated which will be
  factored. Instead of advancing funds to the
  client, the factor first pays the purchase order
  finance company satisfying their lien. The
  balance of the advance is then given to the
  client.
•  
•  

97
PURCHASE ORDER FINANCE

• It is important to understand that purchase order
  finance is a short-term transaction, usually
  lasting less than 60 days. As with factoring,
  it is never used to finance inventory. Goods
  generally must be delivered directly from the
  factory to the customer, bypassing the client
  altogether.
•  

98
PURCHASE ORDER FINANCE

• If the goods must be modified or repackaged by
  the client, this can often lead to a problem with
  purchase order financing. When purchase order
  finance is used to acquire inventory, an
  asset-based lender must agree to take out the
  purchase order finance company when the goods are
  delivered.
•  
•  

99
SETTING UP A RELATIONSHIP

• In most cases, a business owner requiring
  purchase order finance will work directly with
  their factoror asset-based lender to secure such
  financing. In the cases where a direct
  relationship is first established with the
  purchase order finance company, that company will
  refer the business owner to an appropriate factor
  or asset-based lender.
•  

100
Alternative Commercial Finance Solutions

• When Banks Say...
• NO!