Getting to the Next Level – Purchase Order Financing

You have just received a large sales order for your designs, a great opportunity for you, and you cannot possibly fill it because your small business is low on cash or below water to purchase supplies in order to fill the order.   So what are you going to do?  Consider the hurdles:

  • Purchase the goods you will need from your suppliers, with upfront money you don’t have
  • Get the money you need from a bank, but without a long track record or history of impressive financial statements this may not work
  • Accept not receiving payment from your customer until 30 or 60 days after they received shipment, creating a cash flow gap you can’t manage.

If you turn down the order, you may lose your customer to a competitor and you will lose out on your opportunity to grow the business.  You will have to get creative.

There is a way to remedy this situation and that is through purchase order financing.   Purchase order financing (or funding) looks to the credit worthiness (and good fashion sense) of your customer.  Your creditworthiness or the fact that your business may be underwater is not an issue; your customer’s creditworthiness is.  A purchase order financing company works with your supplier or manufacturer to get your garments produced on time.  It also works with your customers to ensure payment of the invoice.

Here is how it works.  A purchase order loan is a fee-based, short term loan and there is no interest charged.  To see if the loan can be made, the purchase order lender investigates the credit history of your customer.  If the customer has a good, solid track record of paying its bills and has the cash flow to pay for the goods it has ordered, a loan can be made.  But there is some information required on your part.  You must know your costs for the product and the gross margin attributed to that product.  If you have a gross margin of 25% or more, then it is possible to execute a purchase order transaction.  This means that you will have enough room to make a meaningful profit.

If your customer has good credit, the purchase order lender delivers a letter of credit to the manufacturer that guarantees payment for the needed goods.  The factory then makes the products, and a third party verifies that the order is complete.  The factory gets paid and ships the goods off, usually to a third party warehouse.  It is rare that you would take delivery of the goods; they are usually shipped directly to the customer.po_financing_process_800

When the bill is paid, the funds go to the purchase order lender, which subtracts its fee and sends the remaining profits to you.  This fee may amount to 4%.

There may be a hitch to the receivables portion of the transaction.  If you have given the customer payment terms of 60 or 90 days, another type of specialty lender, a factor lender, comes into play to provide immediate payment to the purchase order lender. (See my post dated June 21, 2016). The factor lender buys the outstanding invoice at a discount and then waits and collects the full amount owed later, pocketing a profit in the process.  Meanwhile, the purchase order lender and you get paid immediately.  Thus, with this good news comes the bad, there is another layer of costs involved with factoring but this may be required by the purchaser order lender.

Here is what you do to start the Purchase Order Financing Process.  You provide a valid purchase order with a credit worthy customer and the expertise to  manage the process.  The purchase order lender provides payment to your supplier, allowing your goods to be produced and shipped.  Payment is typically completed through issuing letters of credit and ultimately the payment of the invoice.

Benefits to using a purchase order lender.  While you stand to get 94-97% of the profit (implies a 25% gross margin), you are getting money to help you grow your business. You can use a purchase order lender many times; there is no restriction.  The transaction does not show up on your balance sheet (off balance sheet financing) as a liability, thus working capital is not impaired by this transaction and your total debt to equity ratio is not increased.

Who, other than the fashion industry, use purchase order lending?  Importers, exporters, wholesalers, assemblers, distributors and manufacturers, who are experiencing rapid sales growth, capital constraints, sales volatility, seasonal sales spikes, high development costs, stretched credit, new product launches can take advantage of this type of financing.  Industries that can benefit are electronics, housewares, sporting goods, toys/games, furniture, food products, hardware and industrial goods.

To find a purchase order company you can look at industry information and the yellow pages.  Make sure you check references first.




A Lesson in Factoring

Do you have a lot of money your clients owe you in the form of accounts receivable? Do these invoices take time, like 60 days, to get paid?  Are you in need of cash to finance your next production line?  You are not a good credit and are not able to get a bank loan.  What can you do?

Factoring may be the answer.  Factoring means that you sell your accounts receivable to a factor or third party at a discount to provide funding.  It is a short term solution to your working capital problem.


Here is how it works.  You sell your invoices to a factor at a discount and these invoices act as collateral.  You would typically receive 80% of the invoice value upfront.  You will receive the balance remaining less a factor fee once your client pays the factor.  The fee can be paid in any number of ways, but it usually nets out to be about three to five percent of the invoice value.  Factoring is not a loan and does not show up on your balance sheet.  It is the sale of an asset; therefore, you have no liability here.

To qualify for this factoring, your invoices have to be free and clear of any liens.  This means that no other company has a claim on payments when they come in.  Your customers must also be creditworthy.  Why? –  Because the factor will rely on their good credit and ability to pay the invoice quickly rather than on your credit history.

Learn how the factor deals with your clients during the collection process.  Does he send out dunning notices with an indication that the factor is to be sent the payment?  If the client does not pay your invoice, the factor may ask you to pay back the money he paid you on the invoice plus a fee – – something that is called recourse factoring.

If you decide that you want to seek out a factor, do your comparison shopping by looking at factor fees and the amount of the discount on your total invoices, a deposit or application fee, the advance rate and monthly minimums should also be considered.  Factors will not work with start-ups; you need to have a large amount of accounts receivable for the factor to work with you.  You can find factors in the telephone directory or in industry trade publications. Your banker may be able to refer you to a factor, but decide on a factor that knows your industry, can customize a service package for you, and has the financial resources you need.

Make Customer Service Your Mission


Many times in my classes students often confuse a mission statement with the business description.  A mission statement communicates to the world what you as a company stand for.   You have read some of them, like “We aim to be No. 1”, or to “Give back to Society”.  And a business description is one that defines the industry, product and market of the company.  So these are completely different in their scope.

customer_service_2But why not have your mission statement focus on the customer and what you might do for them instead of on you?   As a customer I don’t care about what the company will do but what it will do for me and others in terms of perceived value.  After all, customers are the ones who purchase your products, pay your bills and your salary, and help grow your business from day to day.  So, your company would be nowhere without people to buy your products.  Treating these people extremely well should be the No. 1 goal of every company.  By giving your customers great customer service you will be ahead of the competition.  Give great customer service and your customers will keep coming back and they will tell their friends who tell their friends, and so on.  You will have the benefit of viral marketing, the best kind of marketing you can have.

But, how do you communicate to your employees and the world what your mission is with regard to customer service?  Here are a few tips:

Write down the mission statement of your company and include a customer service component.

  1. Make it real.  Put in place systems that help, instead of hinder, customer service.  Give the employees the tools to make it happen.  For example, make a system to make sure that orders are taken accurately; instill in your employees the bottom-line value of giving good customer service.  Work should end up being easier because of good customer service.
  2. Respect customer service.   We need to see that customer service is an honorable profession.  Respecting the importance of servicing others – whether it is your suppliers, your co-workers, or the mother buying your baby food online – is key to giving great service.
  3. Define what you mean by customer service and then measure the results.  Spell it out in clear, definitive terms what you mean by customer service.  It is not enough to say “The customer is always right”, what does that really mean?

Here are three steps to great customer service:

  1. Figure out what the customers want.
  2. Get it for them accurately, politely, and enthusiastically.
  3. Go the extra mile for the customer.

After you have defined excellent customer service, measure the results to see if it is working and reward the people who give great service.  Keep track of the number of returns, incorrect fulfillment, customer complaints, repeat orders, repeat customers and customer referrals.   Watching service performance scores can predict whether you will have problems in the future.


What do Venture Capitalists and Angels Have in Common?

Have you often wondered what the difference is between an Angel investor and a Venture Capitalist?  There really isn’t much difference except for the size of the investment in your business.

Angels are private investors who are looking for a better investment and return than traditional investment schemes, like in the stock or bond markets.  The age of the company and other specifics are on their checklist: early or formation stage and they look for a payback and a return on their investment where revenues are between $2 million and $10 million.  They would usually expect preferred stock in return for their money which would pay semi-annual interest for the use of their money.  After 5 to 7 years they would expect to be paid back and exit.

Venture Capitalists are on a higher plain than Angels and can be private equity funds or hedge funds.  They invest in early stage companies expecting a high return for the high risk involved where revenues are in excess of $10 million.  Venture Capitalists look for companies with a defensible market position, strong management team, positive EBITDA and discernible growth characteristics.

So what do these Angels and Venture Capitalists look for, you may ask?  Think about the program Shark Tank seen on ABC-TV.  You may have seen Angel investor Kevin O’Leary quizzing the presenting owners of small companies.  He asks, “How am I going to increase my investment?”  “What are your goals for the business?”  “I don’t like your valuation!” “What are your margins?”  “What are your sales and in what time period did these sales occur?”

What is making him salivate or not over the company’s products?  These attractions are not unlike what the Venture Capitalist looks for.  Take a look at the following:

  1. Unique or proprietary products or services.  A patent owned by you is a plus.
  2. Existing sales are evidence of consumer demand where revenue growth is greater than 20% to 50% year to year; gross margins are over 40%; and with a lean management team.
  3. Increasing sales would be the result of their investment by marketing or hiring additional personnel, which they will oversee.
  4. Realistic valuation based on your sales and profits
  5. Exit strategy must be included in your plans, like selling the company or merging with another company.

While some of you may say that seeking funding from these people is not worth it.  Think about this.  If you did not have their investment you would not be able to grow your business faster, gain market share and have the benefit of their expert opinion and management expertise.  Their contacts and relationships would help you gain clients and suppliers for increased revenue and growth.  So it is worth it, but make sure that you benefit from the relationship as much as the investor would.  It is a two way street — the investor is making money on his investment, and you are gaining a person who can direct you in your business with his expertise, open doors to business partners and add to the valuation of your business.

Thoughts on Hiring

Recently, I came across an aspiring entrepreneur who told me that his plans for his company would include hiring many of his friends from college.  He has trust in these friends and they bring a lot to the table in the way of creativity and business acumen.  Besides they would have a great time going to work every day and wouldn’t that provide a great working environment!

My initial reaction was to congratulate him on his plans for his business.  Then I told him that hiring your friends is not a good business practice.  A business is not a social club where you can continue the fun you had in your college days.  By hiring your friends you may not get the critical skills you require for the business, and you will not be able to get the benefit of different skills and points of view of people who come from different backgrounds and education.

A prospective business owner has to consider the business and what it needs to be successful.  Considering the kinds of skills one requires of an employee is essential and drafting out a job description with salary range for a position makes good business sense.  It offers a tool for planning your organization and the expenditure for human resources that you will have to budget for and cover with your sales efforts.

Of course, you don’t need to be friendly with a new employee.  After all, you want him to produce for you.  All you need in your business relationships with this new employee is to respect him and he you.  You may not like him, but if he is a good employee and provides you with quality work and you respect him, then that’s all you need.

The owners of a start-up company also have to keep in mind their budget constraints.  If they cannot afford the people they would like, then they may consider hiring an intern, or someone on a part-time basis.  Whatever you do remember:  you have money and time invested in your business and you want it to grow.  Poor employees can hold you back; you want to have employees who can do the job and help you make a success of your business.

How to Accelerate Cash in Your Business

As you manage your business from day-to-day you need liquidity, that is, cash.  Cash is required to pay your bills from suppliers to your utilities bills and even your employees.  So, where is this steady flow of cash coming from?  Your customers!  How do you increase your cash balances in your business? Let’s investigate the Operating Cycle and the steps that are involved in the conversion process.

In order to understand how to accelerate the cash conversion process is it important for you to understand your Operating Cycle.  That is the amount of time it takes for you to convert cash to inventory to sales to accounts receivable to collections to cash again.

In any business, you begin it with cash as you can see below.  You determine how to spend it whether it is on  furniture and equipment or your raw materials. As your raw materials are converted into product you start building inventory. As your sales people become involved and start selling, your billing department bills and your accounts receivable balances increase. Depending upon the way your customers pay their bills, you may receive your money anywhere from 45 to 60 days. Then it is deposited in your checking account and the process starts all over again. At each stage of the Operating Cycle there is an opportunity to shorten cycle times.Operating Cycle Chart

Strategies to Improve Your Operating Cycle

 Your accounts receivable levels are important to watch.  Bills are usually collected on a 45 day basis.  Some customers may even pay sooner than that.  Those customers are gold. Others are not.

You should indicate clearly on your invoices what the terms of payment are.  These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due.  You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days.  This customer is costing you money!  You are actually financing this customer to the tune of 36% a year.  That is an incredible financing charge.  Did you ever realize that you were becoming a bank by not collecting on these invoices?  Therefore, it is critical to your cash flow to collect the amounts due you promptly.  Hence, the time value of money:  a dollar today is worth more than a dollar tomorrow.

Consider the following actions to take:

  • Have your available cash reported to you daily and chart it against weekly Accounts Receivable and Accounts Payable Reports. These reports will indicate how long your invoices are outstanding and which ones to watch closely for delinquency.  Your current ratio will be improved with monitoring and you will understand your business better.
  • Get your bills out more quickly. Bill as soon as the shipment is sent out. Hire a person to do nothing but make sure invoicing is timely and follow up on payments.  Send out friendly reminders at least 5 days before the deadline that payments are due.
  • Follow-up calls to customers are important to remind them that the invoice is due. These calls will also reveal whether the order is received in good order and if the customer is happy with the shipment.  Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.
  • Understand each customer’s payment cycle, and time your billings to coincide. Offer credit card payment, leasing options to make payment easier for them.
  • If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away. Making an installment plan with him is beneficial to you and to him.  You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.
  • Shorten cycles for delivery of your product. Work-in-progress times should be shortened for faster completion of projects, and the faster your will get paid.


So You Want to Expand Overseas!

The idea of expanding overseas is an attractive one and you may gain new customers. 95% of the worlds’ consumers reside outside the U.S. (according to the Office of the U.S. Trade Representative) – those are all potential new customers!  Expansion is especially easy with the advance of the Internet.  Anyone with a computer and access to the Internet can see your website.  With an Internet company all you need to have is the ability to fulfill orders and ship them to their overseas destination and the profits will come.  But boosting bottom lines overseas is a dynamic challenge requiring thorough knowledge of international law and a cultural smorgasbord of tastes and aesthetic hurdles.  Let’s examine some of the issues involved in this expansion.

Cultural Norms

The most important knowledge that you will need is a thorough understanding of the target culture.  You will have to learn how each culture operates before you do business there.  Every country has its own way of doing business and its own type of people who have likes and dislikes.  Understanding the cultural niceties and changeable legal statutes and having a shipper who has this kind of knowledge and understands global trade will greatly enhance your success. It is also beneficial to learn the language of the target country so that you will have a better understanding of the culture and the nuances of the language.

Certainly there are other factors that may appear insignificant but will have substantial cultural ramifications on your success. Certain colors are inappropriate to use in certain Asian countries.  Pink and purple are sometimes unwelcome, and red signifies different things in different places.  White is a color indicating death in Japan. So, if you are designing something internationally, you have to keep these things in mind.

Time Zones and Currency Exchanges

Doing business in a different time zone, like in Australia or Japan, can be a strategic nightmare.  Running a business here and there requires strategic planning. So you must plan accordingly for the country you want to do business in and make some sacrifices with your family and sleeping routine.

Make sure that you collect as much payment in advance so that you can attack obstacles around currency conversion and have as many communications around setting expectations as possible, which will help ensure a successful engagement.

Technological Infrastructure and Usage

Understanding the technological abilities and infrastructure of different countries are also helpful.  What mobile devices, for example, does your target market use?  While  I-Phones and Blackberries are popular in the United States, Nokia is the device of choice in Brazil.  When contemplating a new market you have to make sure that your mobile website is coded for these devices and built with a compatible interface.

Business Model and Product Demand

While going international is a glamorous and exciting endeavor, there is one critical feature that we cannot overlook.  In order to be successful overseas you have to have a successful business model with a product that sells very well here.  You have to have adequate cash flow to support your present business as well as afford the costs and expenses of expansion. You also need thorough market research to understand where your product will be in demand internationally.

We must also get back to the basics of international marketing and expansion by first establishing partners in target countries, who can open doors for you.  Organizations like international chambers of commerce and industry-specific organizations can assist you in setting up business in countries.  These organizations can advise you on selecting reputable agents in the country to help you introduce your product to certain retail organizations that can sell your product and generate demand.

For more information on expansion internationally, see, and



Are Some of Your Customers Late Payers?

Having some of your customers pay late can cause you a lot of “hand-wringing”.  You can’t pay your own bills on time.  You ask yourself should you ask for a line of credit from a bank in order to pay your own bills.  It is a constant struggle for small businesses to get paid on time.  In fact, 64% of small businesses are paid late.

What are you going to do to alleviate this problem?  Charging a late fee could help late payers get up to date.  Are you reluctant to do that for fear of creating ill will with your customers?

But not charging a late fee would be a mistake, especially for chronic late payers.  Businesses have to realize that they need good paying customers if they want to make money.  Remember my earlier post, on January 13, 2016, about Sam Walton saying “if you want to make money collect on every invoice”.  Also, you could be financing your customer’s business to the tune of 36% a year.  Why do this, you’re not his partner!

If you decide to charge a late fee you should have a policy in place or even a contract with the client which would include your late-fee policy.Sample_bill  You can’t decide to charge a late-fee after the fact if it wasn’t in your initial agreement.  Your invoice should include a statement at the bottom of the page which indicates that late payments will incur a charge of 1.5% per month, for example.

Even if you don’t charge it, it can work well as an incentive to get people to pay.  Upon receiving an invoice which includes a late fee your customer may give you a call to settle the bill, or even negotiate the rate of late-fee charged downward in a new contract in lieu of other charges that may arise during the project.

Small businesses must be clear on their policies up front and implement a communication strategy to collect so they’re in contact with customers promptly if they are late on payment.  Even is they are late one day, you should be on the phone with them to tell them that you haven’t received payment as yet and when can you expect to receive it.  You can then gauge the customer’s response for sincerity when you do reach out.

It’s Spring and Its Tax Time


adding machine

As small business owners we have to be mindful of the fact that we have to prepare our taxes on the business as well our personal filings. As budding entrepreneurs we may not realize that there is a fair chance that we could create tax headaches for ourselves.  Since we went into business we may have more forms to fill out that are growing more complex as time goes by because of new laws coming into play in the federal and state tax codes.  And it can become difficult to keep abreast of the changes that affect us.

Just think about it. If we have employees we have to consider the new withholding taxes and the sheer volume of work that is involved. And it is not just the work; employees will need explanations as to why their pay stub is different. The employer must file federal tax Forms 941, Employer’s Quarterly Federal Tax Return, and 940, Employer’s Federal Unemployment Tax Return (FUTA), which address reporting of withholding for social security, Medicare and unemployment, as well as for federal and state income taxes.  So it is difficult for the small business owner to keep up with all this information and the changes in the withholding tax laws and rates.

With regard to the business itself, Schedule C, Profit or Loss from Business (sole proprietorship), revealing the sales and expenses of the business, must be completed. Some issues may come up in preparing these; for example, any change in the value of inventories must be calculated and the treatment for the related profits and losses must be addressed. The treatment for such changes can be a tricky situation for the entrepreneur.

If you have an online business and sell to customers out of state, there is another issue which can become problematic. Some states which are short of cash may force companies to collect tax on sales made to their residents even when the company is based elsewhere.  Court challenges on this topic leave the requirement in doubt, but if the trend catches on companies would find it harder to comply with the various sets of rules and tax rates.

What is the entrepreneur to do? In the first place it is recommended that a payroll preparation company that serves small businesses be hired to prepare your payroll and file the required withholding taxes and quarterly reports for your business.They are not expensive and the time and energy they can save you makes this task worry-free.

Hiring a small business accountant who has experience in your type of business is also worthwhile. Make sure you interview them for their abilities and your needs. While the fees they charge are an important consideration, you may want to retain them instead of getting billed for every question you may have. An accounting firm should have a retainer, like $150 a month, to cover payroll, tax returns and other filings. In this way you will be able to develop a relationship with the accountant and someone you can lean on.  Nickel and dime billings for phone conversations would be nonexistent.

An experienced small business accountant who understands your business can help you grow your business.  If he is asking the right questions he would address your goals and where you want to be in the next couple of years. He can help you shape your life.

What makes a Good Business Plan?

At my former job in a major investment firm, I had the responsibility of developing new business for the firm.  In that position I received about 40 business plans a week from entrepreneurs and senior managers of companies seeking financing, and I reviewed about 25 per week.  Why didn’t I read all 40 plans?  Here’s why.

The opening section of a business plan is the business description probably written in two paragraphs.  Here the writer describes his business and product and indicates what his target market is.  If after reading the opening paragraphs I do not know what his business is or what he is talking about, I reject it and move on to the next business plan.  A writer has to write his business plan in a way that is easily understood and is simply written.  If you are an engineer and cannot relate your business in simple terms, then get someone else to write it.  There is no excuse.

I also look at the sentence construction, grammar and spelling.  If there are spelling mistakes or grammatical errors, it indicates to me that the writer has exhibited a level of care which is not conducive to managing and growing a company.  He is neglectful and pays no attention to detail.  If you have a shot at having a professional investor look at your plan, then by all means make sure that you have done your research accurately, use proper grammar and your financial information is added correctly.

When I have a business plan to evaluate I look at its presentation.  Is it neat and attractively done so that it would make you want to open it up and begin reading it?  Does it indicate what the business is and what the product is, how you are going to make money and what your profit will be?  Is what you say in the first section of the plan supported by the financial information in the second section of the plan? Are your profit margins, return on investment, and return on equity comparable with similar companies in your industry?

When you are constructing your business plan, heed the above and you will be sure to generate interest in an investor to read your plan.