Innovative Trade Credit Finance Program for Bankable Credits
Based on my experience as a previous small business owner that was profitable, had several fortune 1000 accounts and never delinquent on payments, I could not get a credit line increase from my bank to grow my business. The bank asked, Mr. Banasiak what type of collateral do you have to cover the loan? Since, I was in the business of credit scoring, an intellectual property based business I asked how many electrons would you like as collateral? They didn’t find the humor/sarcasm in my response. The bank asked if I would like to put up my home to guarantee the loan. I told them I don’t think my wife would like that very much. Needless to say, I didn’t get the line increased and there was no other third-party financing offered.
I am sure you have heard stories similar to mine all too often. It’s tough out there for many small-to-medium sized companies trying to grow their business. Working capital is limited and traditional business loans are hard to obtain. The regulators have placed very stringent credit controls for business lending, which is stunting business growth. And for some, alternative financing, such as factoring accounts receivable and traditional purchase order financing are not appropriate for their business due to collateral subordination's among other underwriting criteria.
It becomes a double-edged sword. Their product or service is in demand, yet they have to turn away the business, because they do not have the cash flow to fund additional deals due to bumping up close to their credit limit creating lost sales and revenue. Businesses are limited by the credit line from their bank, ABL lender or SBA lender and may not be eligible for a credit line increase due to limited collateral, time since approval as well as other underwriting criteria. However, they still need working capital to buy inventory, take advantage of wholesaler closeouts, overstocks, liquidations, off-season deals, etc. So, how do these businesses grow if they do not have the cash that is needed?
Fortunately, now, there is an alternative financing solution – Purchase Finance Program (Trade Credit). This unique, easy to obtain financing solution allows businesses to buy goods for resale, inventory or consumption – finished or unfinished; unlike purchase order (P.O.) finance, which has very specific requirements to qualify and generally a subordination of the collateral by the primary lender. Vendors can also be domestic or international and it is not only for business-to-business companies, like most factoring requires, business-to-consumer such as retailers or construction companies can qualify.
The banks, SBA lenders and ABL lenders are positively responding to this financing program, as it offers them several advantages in addition to helping their customers. They are able to maintain their customer relationship, because this financing goes on top of any loans or credit lines. Therefore, there is no effect on existing bank, SBA or ABL lines or the bank’s collateral position, since this product takes a 2nd UCC filing position. Not many other financing solutions, if any, take a 2nd position UCC for small transactions between $50,000 and $5,000,000. So, there is there is no disturbance of existing bank or other lender security. The winning piece for the primary lender is that whatever inventory or goods that are purchased becomes the bank’s collateral since they have the 1st UCC filing lien. In addition, purchase financing is essentially similar to a revolving credit line facility given a credit line is assigned and the process can be repeated on a regular basis as long as the line is not exceeded. Typically, the terms are up to 60 days, which generally allows for revenue generation, but extended terms can be negotiated.
I guess at this point, you might be saying to yourself this seems to be too good to be possible. What’s the catch? I will tell you there is no catch. The only requirements are the business must be in good financial health, have good cash flow and be credit insurable. The key to the success of this program is that the company must have the ability to pay back the obligation within terms.
As with any type of financing, there are companies that are better suited for the Trade Credit Finance Program. Retailers, importers, distributors, exporters and manufacturers, independent traders, established small companies as well as medium to larger businesses are more ideal. It is the perfect solution for these businesses, because it provides immediate access to capital needed with flexible terms to purchase raw materials, equipment, products, etc. to grow their business helping meet their customers’ demands on top of what their bank can provide.
There are many benefits to the Purchase Trade Credit Finance Program. It increases a business’s buying power allowing them to complete more deals. They don’t have to turn away business so they avoid lost sales from lack of inventory, especially during peak selling season. No financial strain is put on their business and it frees up working capital to be used as needed. They can obtain volume discounts and/or early discounts for paying cash up-front. In addition, they can maximize seasonal buying opportunities as well as take advantage of any supplier deals. They can order inventory from several different vendors simultaneously on the same payment plan. What’s nice too is that there are no conditions placed on the purchase of goods or services. Raw materials, parts, equipment and even third party staffing services are all okay. Best of all, it strengthens the financial health of business credit, allowing the company to become eligible for credit line increases in the future.
Getting started is easy, quick and flexible once approved. The business orders the supplies they need from their vendors. The financing company pays the business’s vendors and the business receives the goods and services. The business retains the working capital and continues to sell to their customers. They collect earnings from their customers and continue increasing capital. As needed, they purchase more inventory and/or services to meet their increasing customers’ wants and needs. The financing company continues to fund the company’s inventory while they grow their business. The business makes payments on financed inventory as capital improves within agreed terms. The primary lender likes this and are more likely to increase the credit line in the future once their underwriting criteria is met.
Companies are always in search of ways to increase cash flow to grow business and their financial health many times rests on the ability to have access to working capital. The Purchase Trade Credit Finance Program is optimal for potential borrowers who have limited bank availability, do not qualify for purchase order financing, accounts receivable factoring is not an option or simply want to make a purchase using efficient means of financing. This program adds another finance option to meet businesses’ different needs and is more obtainable. The purchase finance product addresses companies’ needs with extended terms, fast turnaround and no bank security disturbance. Banks, SBA lenders and ABL lenders like the program since the inventory becomes their collateral and subordination of UCC collateral is not necessary. This is a great way for a business to obtain more capital when they have used up their credit line with their primary lender.