Inventory and Purchase Order Financing in Canada is a niche, specialized area of business financing for Canadian firms . Prior to contemplating of securing this type of financing we encourage you to talk to a credible business financing advisor with experience in these areas.
The need for for inventory and P.O. Financing in Canada arises generally from two areas of demand for clients – they are growing too quickly and have secured new orders and contracts which they need to finance. Secondly, since inventory for many firms is a key component of your current assets the Canadian business owner has traditionally found it challenging to finance inventory through traditional institutions such as our Canadian chartered banks. In the majority of companies in Canada all working capital revolves around the turnover of inventory and receivables – Depending which industry you are in and what your product is the inventory line on your balance sheet can be very significant in relations to your total working capital.
If your firm turn over inventory, say for example, in 60 days but finds you need to now keep 90 days of inventory on hand your cash needs are therefore growing, really those needs are the new equivalent of another 30 days of sales.
Most companies know of how calculate their investment in inventory – it’s a simply calculation you should probably be monitoring monthly. The calculation is as follows:
Average inventory/average daily sales = days of sales in inventory
It’s that simple a calculation.
In Canada you might have to consider alternative financing of your inventory outside your banking or regular arrangements. Really this is a form of what we call asset based lending, with of coruse inventory as our focus.
How much finance can you get for your inventory? You probably know the answer already, which is of course – ‘it depends’! Depending on the quality of your inventory, and its turnover you should be able to receive anywhere from 40-60% in our experience. The greater the commodities value of your inventory the greater financing you will get. It is mandatory that you take the right steps in the business field to avoid any loss in profit and business insolvencies as these things can lead a firm towards dissolution.
Purchase order financing continues to be another unique challenge for growing, or many times smaller firms in Canada. It’s a vicious cycle the Canadian business owner of financial manger is very familiar with – their suppliers want payment up front, your customer won’t pay you in 30-60 days, and you’re caught in the middle with the manufacturing or delivery dilemma. Banks traditionally cannot assist you in this need, as they will tend to focus on traditional borrowing criteria. But the purchase order financier will pay your suppliers on your behalf, take collateral on the inventory, and monetize that inventory into cash when you create your receivable and shop goods. Purchase order financing is expensive, generally in the 2-3% range per month, so you should view this as a reduction in your gross margins. If you have good gross margins you can significantly benefit from P.O. Financing.
In summary, inventory and purchase order financing are needed by many Canadian firms who cannot otherwise finance their business traditionally. These two types of financings are specialized and should be entered into with a proper level of analysis re costs and benefits. Speak to a trusted, credible and experienced advisor in asset based lending in Canada to determine if these two financing strategies are right for you.