Using Purchase Order Financing to leverage small business growth
By: Raul Velarde, Senior Vice President, Bibby Purchase Order Finance. Inc.

Growth is a welcome word for any business but that same growth has the potential to create a capital shortage.  When a small company is growing fast, it may need more cash to purchase the goods or raw materials that will permit product development and the next sales transaction. These undercapitalized companies may have to wait to get paid from the last transaction cycle in order to finance the new sales. Often, small companies will have to pass on new opportunities because they lack the capital to complete the sale. This leads to a need for more financing that usually can’t be obtained through traditional sources, such as a bank loan. Most banks focus on establishing credit limits based on equity and other financial ratios. An equity injection could be an alternative to solve immediate cash needs, but in the long run it may be the most costly solution since it dilutes ownership of the business. The ideal solution for many growing small and medium-sized enterprises (SMEs) is Purchase Order (PO) financing which provides credit based on each sales transaction, the history within that business and the profit margins within each transaction. Purchase Order financing is a short-term funding technique used to finance the purchase of goods that have been pre-sold to a credit worthy end customer. PO funding is transaction financing, based on purchase orders, allowing the borrower to purchase the goods to fulfill specific orders.

PO funding as a solution often escapes businesses since the mechanisms are not as easily understood as the more traditional types of financing. In addition, many businesses do not know where to turn for such financing or even the full benefits it can provide. PO funding can guarantee or pay up to 100% of the cost of goods sold. The transactional nature allows for taking on larger orders, limited only by the credit worthiness of the end customer and the sales capacity of the business. PO financing may allow a company to manage growth, increase market share and add to its financial strength.

Typically, there are two business scenarios suited to PO funding.  The most common examples include start-up businesses with limited working capital, businesses with seasonal orders and seasonal cash needs, and the rapid growth company with new sales opportunities to seize.

PO funding can work in conjunction with other types of financing as well. It can complement existing bank relationships and help businesses grow by putting the full spectrum of financing tools at their fingertips.  PO funding companies will often require a receivables funder or factor to pay off the advance when goods are delivered to the customer.  Because receivable funders and factors are in the business of managing credit risk, PO funders can concentrate on the front end of the transaction without having to manage the credit and collection portion of the relationship.

Together, these mechanisms can fund the full cycle of working capital limitations felt by many growing small businesses. Although PO financing could be used on its own, up until the customer ultimately pays the invoice, using AR and PO together results in less risk for the client and the lender, which in turn can strengthen the position of the borrower and can translate into savings over PO funding on its own. This is due to the fact that AR and PO financing are based on different types of collateral: PO funding being collateralized by the goods purchased and the confirmed purchase orders and AR funding using delivered goods and an invoice as collateral. In essence, the difference is that with AR funding the product has been delivered and the customer owes money while with PO financing there is a bona fide promise to deliver yet no money to be collected.

The challenges faced by growing small businesses usually are not only financial, but often also operational challenges, combined with the shortage in human resources and related intellectual capital that may be required. Factors and Purchase order finance companies offer many value-added services that assist the client in effectively managing the trade cycle.  Purchase order finance companies offer supplier-side logistical support while factors offer credit checking and collections services. These types of services are especially important to small companies in the import and distribution business where special skills are needed to coordinate the importation of goods.  The extent of this import support service is determined by the importer and can range from logistical advice to actually managing the importation process. These value added services are now offered by Bibby Financial Services under a new division, Bibby Purchase Order Finance Inc, created specifically to put together flexible funding solutions with the growing small business in mind.

By taking advantage of PO funding services businesses can successfully manage its growth without the continued stress on existing working capital. The value added services also relieve the business owner of many burdens associated with the sales cycle.   Bibby Financial Services provides a complete line of Trade Finance solutions to SME’s throughout the United States and Internationally as well.

Raul Velarde is Senior Vice President of Bibby Purchase Order Finance. Inc., a subsidiary of the Bibby Financial Services Group and Marcus Ferrari is a Business Development Officer of Bibby Financial Services, ,which is dedicated to providing financing solutions for small and medium sized businesses. The company has a flexible approach which translates into innovative ways to help clients grow. The company is also versatile, offering a wide range of financing solutions for a variety of clients, from start-ups to financially troubled and mature companies. For additional information, please visit our website at: www.bibbyfinancial.com.

Factoring can make you money
By T.J. Gill, Vice President, LSQ Funding Group

Simply put, factoring helps businesses meet their cash flow needs through accounts receivable financing, while providing professional A/R management services. Many people view factoring as a short-term stopgap to plug the
working capital hole that inevitably presents itself in almost every growing business. Although factoring can often help a business refresh its working capital in the midst of a 'cash crunch', it can actually be a highly profitable long-term strategy. With adequate cash flow, a business has the ability to not only avoid stoppages in business, but to increase customers and sales. Cash flow is the lifeblood of any business and without it, regardless of profitability; a business will likely cease to exist.

Factoring is one of the few forms of financing that can support rapid growth in a business. As the receivables increase, so in turn does the funding. Therefore, it stands to reason that by reducing working capital requirements, a company can more rapidly reach their long-term growth plans. The net effect is increased sales, increased production, and decreased stress. Factoring is typically more expensive than traditional financing, however, the cost of factoring is usually significantly less than the loss of net profits that would have otherwise been generated by the substantial growth that it supports.

In addition to the immediate cash availability that factoring creates for business, a factor becomes the credit and AR management arm of their client's company. Making wise credit decisions with respect to customer
limits can help a company avoid severely aged accounts receivable and dilution as a result of bad debt. Factors generally have access to multiple credit sources that track company payment trends and credit worthiness. As
a result, a business that fully utilizes their factoring company adds a sophisticated back office credit department to their company.

Lastly, a full service factor can reduce the turn on accounts receivable through regular follow-up on outstanding invoices and periodic verification to ensure that any potential problems are identified early in the payment process. By outsourcing the management of accounts receivable, a company frees up valuable time to concentrate on increasing sales and managing staff.

In summary, a factor can typically help a business grow at a more rapid rate than traditional financing, while providing the necessary back office support to ensure that the customers to whom the business sells are credit
worthy companies and that those companies pay in a timely manner.Article submitted by TJ Gill of LSQ Funding Group, L.C.

To learn more, contact:
T.J. Gill
Vice President
LSQ Funding Group
800-474-7606 x269
407-515-5730

Considering Your M&A Options
By: Walter G. Kortschak

By addressing some key variables, you can ensure your business’s merger with another company is a successful one for all parties involved.

Today more than ever, growing companies are looking at the M&A market as an attractive exit alternative to the IPO market. This strategy is being driven by strong M&A valuations, as well as higher regulatory and market hurdles in the IPO market.

Yet the decision to be acquired is far from a simple financial calculation where business owners seek out the exit strategy that will net the most liquidity. Most entrepreneurs seek a transaction that will maintain and enhance their company’s market position, complement their product line and distribution system, and generally allow their business to continue to grow.

When well executed, an M&A transaction can accelerate the growth of both acquirer and acquired company. In fact, some experts, including David Harding, a director at Bain & Co. and author of Mastering the Merger, believe that it is nearly impossible to build a world-class company without acquisitions. Unfortunately, these positive outcomes are not always assured. A recent study by Bain & Co. found that only about three in every ten large deals creates meaningful value for shareholders. In fact, half of them destroy value.

What should an entrepreneur be looking for in an M&A transaction? Both companies should be sure that the strategic fit is sound one, and that a business combination is in the interest of all concerned. Some of the necessary elements for a successful business merger include complimentary distribution channels, customers, and business cultures. In order assess the likelihood of success, consider these critical questions:

Can you continue to succeed running an independent company? And equally important, do you want to run an independent company?
One of the key questions in considering an acquisition is fairly simple. Do you really want to continue to run an independent company? And, on a related note, can your company continue to grow and succeed as a separate entity? Remember, an acquisition, unlike an IPO, will often end your involvement in the company you’ve built from scratch. If you’re looking to exit your business, it’s a great option. It also may make sense if you feel your company has gone as far as it can go as an independent entity – and that only integration with a larger company can bring it to new levels of growth and profitability.

What’s the acquirer’s track record in M&A?
The best way to succeed as a deal maker is to make lots of smaller, low-risk deals that hone the acquirer’s ability to select and integrate companies into its organization, says Bain’s Harding. By scrutinizing these previous deals, you can get a good sense for how your company is likely to fare once acquired.

Is there a good fit with the acquirer’s core business?
Successful deals typically bolster an acquirer’s core business. According to Harding, deals that grow a company’s scale – adding similar customers or products – are likely to succeed. Those that expand a company’s scope – extending it into new customer segments, products or geographical markets – are less likely to add value.

How well does the acquirer understand your business?
A seasoned acquirer will demand extensive due diligence, seeking to get a handle on your company, its competitive position, and market challenges. This will help the company focus on the key drivers of your business. Companies that have taken on a private equity partner may already have gone through such a due diligence process and will already have enhanced their financial and operating reporting systems to provide the data an acquirer needs.

Is there a good plan for integration on the table?
It’s important to move quickly once a deal is finalized, integrating business units in a rational way so that employees can continue to focus on their jobs. Developing an integration plan before the deal is finalized can make the transition easier.

What will happen to your company?
As a business owner, you may have strong preferences about what happens to your employees, your business facilities, or even the name and brand of your company once it’s acquired. Some acquirers may agree to these types of conditions in exchange for a lower offering price. Make sure you spell out your requirements clearly – and that the acquirer is prepared to meet them. Your exit strategy is simply the final stage in a long process of building your company’s value. By addressing these key variables, you can ensure that the merger offer you’re considering works well for both your company and the acquirer.

Reprinted with permission of SUMMIT PARTNERS.
Walter G. Kortschak is a managing partner of Summit Partners, a private equity and venture capital firm with offices in Boston, Palo Alto, and London. Summit Partners invests in growing, profitable, privately held companies. Walter can be reached at 650-614-6600 or wkortschak@summitpartners.com
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