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Purchase Order Financing: A Bitter but Sometimes Necessary Pill to Swallow
Purchase Order Financing: A Bitter but Sometimes Necessary Pill to Swallow.
In particular, if the accountant’s client or the CFO’s employer is: a vendor, a distributor, a supplier, a wholesaler, or an importer, the nature of their business is often that they need funds on-demand to take advantage of an income-producing opportunity when it arises. A giant retailer buying goods and merchandise, or a large company procuring materials could issue an accountant’s client a purchase order where there is a limited window for that business owner to produce/deliver the inventory.
When this business owner approaches us, we know this executive perhaps, with his accountant or CFO has already been rejected “everywhere.”
Even if accountants or CFOs perceive purchase order financing as distasteful, the value it can provide for their business at this point deserves to be considered in its proper context. Accountants, CFOs and controllers should have a working knowledge of it should they be drawn into a financial crisis with their client or employer.
Let’s say a CPA’s client receives a $1,000,000 purchase order from Macy’s. This client does not have the financial wherewithal to produce the goods and fulfill the order. On a fee basis, we place liens on this order and control it, negotiating anywhere from 3-4% per 30 days. (We also charge an upfront due-diligence, research, documentation fee of about $1,500, which is usually one-time, first-time.)
Together with the client, we take the purchase order to a factory (often overseas). We issue a letter of credit with our bank stating that payment for the inventory will be released when it properly arrives, on schedule at its destination. As part of client support, we bring a knowledge experience base of issues like: manufacturing and warehousing operations, quality inspections, shipping, tariffs/duties, and more.
When the inventory gets properly delivered, say 90 days later, we get “taken out,” either by the retailer, a bank, a factor, or it could be the client themselves.
It is important for the accountant and their client to understand that they have not put up any real money at risk. Beyond the initial application fee, all of this has been done with our money. Furthermore, we are not financing any of the items that a bank, a factor or other lender would typically allow like real estate, payroll, operating expenses, or more. Our money is dedicated to funding a specific purchase order and transaction…
We have encountered many scenarios where the accountant or CFO rebukes us while urging their client or employer not “to sign up.” “You are charging my client 48% interest! This is outrageous!” the CPA or CFO declares. This is distorted and untrue. For example, the client is paying us 4% per month for the temporary, transactional use of our money. So for 90 days, the client is paying us 12% or $120,000.
If this business earns a minimum of 30% profit on such a transaction, which many do — the business is keeping $180,000 — again, without having laid out any real money. (Often this is actually even less because we are only financing the actual cost of the merchandise which would typically be about 70% of the selling price. In the above example, the fee would wind up being 8.4%, the business paying $84,000, and their profit being $216,000.)
Back to our original premise: If the business owner was able to obtain funding from a bank, a factor, or an equity investor, they would not be coming to us.
Another important feature: Most bankers require several months to process a loan. And if the money is being spent internationally, many bankers will have reservations and restrictive covenants. We are able to process a purchase order finance transaction in five-to-ten business days.
Generally, accountants and CFOs need to do a better job of giving bitter medicine to their client or employer. All we have to offer is that bottle of bitter-tasting cough medicine called purchase order financing. It is going to burn while it goes down the business owner’s throat, but it will work and may be their only remedy available to stay alive.
Richard Eitelberg, CPA, is director of RMP Trade Credit. Matthew Davis is director of credit and underwriting with RMP Capital Corp., based in Islandia, Long Island, NY. www.RMPCapital.com , www.RMPTradeCredit.com