Financing Startups? Yes - But Be Sensible!

We are quite happy to offer purchase order financing to startups. Because of that, we get many calls from budding entrepreneurs looking for business financing. Many are disappointed when we decline the opportunity to participate in the business. In part, we decline many of them because they have unrealistic expectations. Here are some examples of things we see that will garner a DECLINE:

1. Entrepreneurs that don't put any money themselves

This one is a classic. We get a balance sheet that shows that the owner put $1,000 in their business with NO other assets or sales and expect us to fund the rest. I think there is a myth, in part propagated by some famous entrepreneurs that did start with $1000, that this is enough. Let me ask, why would *WE* risk capital if the owner is only risking $1,000? The short answer is we wouldn't - and don't.

2. No Experience

It is common for people to try and start a business for which they have no experience. As a matter of fact - I did so myself. But it is unrealistic to ask others to finance your startup until you have had some successful transactions under your belt. You should expect to self-finance your business until you learn the ropes, just like I did :-)

3. Unrealistic Goals

"Marco, this is a new concept and we'll be a $12,000,000 by the end of the year. We just need the Money. And, oh by the way, I only put $1000 in the business (read #1)." Sorry, the odds are that you wont be a going concern by the end of the year. Well thought out sales forecasts are a must. And also - tone down sales expectations - otherwise you could set your self up for failure if you don't meet them. Remember that running a startup is challenging.

4. Thinking their business has no risk (riiiight!)

This is a classic. I get a call from a startup entrepreneur who tells me their transaction has no risk. As a rule of thumb, I always turn these down. No exceptions. Even if everything else appears well thought out. All transactions have risk. Period. Otherwise, there would be an opportunity for Arbitrage. And if an entrepreneur cannot see that -then we consider them dangerous. Investors consider one of the few risk free assets to be US Government securities (e.g. TBILLS).

So weather you are looking for a business loan, factoring or any type of funding, keep these points in mind.

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Looking for information on purchase order financing? Read the purchase order finance blog or look for business loan financing in wisconsin.

The 5 C's of Lending

Although this blog is not about lending, let me borrow a page from their playbook. Lenders always talk about the 5 C's of lending. They are:

1. Capacity


2. Credit


3. Collateral


4. Conditions


5. Character

Today we will talk about Character. Now that the economy has been in shambles for a while, many companies are starting to become desperate for any kind of business financing. It's a survival thing, and it's understandable. But credit crisis or not - the 5 C's still rule. Now, more than ever. Character - and this refers to the owners and managers - is critical. What is character?

Well, it varies by firm. In my little world of purchase order financing, for us, Character involves having prospects that either:

1. Have a complete clean slate. That is, they have good/reasonable credit and not blemishes such as bankruptcies/etc.

-or-

2. Have a blemished slate - that is explainable and reasonable. And also - be upfront about it. Don't wait for our underwriting team to find it.

You read #2 right. Don't hide it. Rather bring it upfront early and have sensible explanations for what happened. Even if you made a "dumb mistake", be upfront. That may not guarantee approval, but will almost certainly trigger respect. And respect helps you get approved.

Let me tell you a story about a prospect that I had years ago. They ran a successful start up that sold products to the government. They had not been able to get a business loan so they approached us for some financing. In their application they marked that none of the owners had ever been involved in a bankruptcy.

Our search indicated that they had a prior Chapter 7. When confronted, the owner explained that there had been a medical problem - coupled with a nasty divorce - that led to the bankruptcy. If they had explained this situation upfront they would have been approved. But they hid it and lied on their application. Unfortunately, we declined them.

This may sound harsh. But think about it this way. Problems will happen during a financing relationship. It's just how it is. We understand it. But we also only want to work with people that will own up to them and face them, not with people that will hide them until the problems blow up.

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Looking for information on purchase order financing? Read the purchase order finance blog to learn about business loan financing in wyoming

Credit Enhancements as a Substitute for Purchase Order Financing

Recently I have been getting a number of call from companies that are looking for purchase order financing. After a short conversation, we invariably find that we can usually help this client by combining conventional invoice factoring with a credit enhancement.

Lets first look at the problem they are trying to solve. Most of this prospects have suppliers that are unwilling to extend them additional trade credit. If their suppliers were willing to extend their already existing credit they would be fine.

Well, this can be done using factoring and including an agreement where the factoring company direct advances to the supplier (to satisfy moneys owed) first, and then send the reminder to the client. Usually, this does the trick.

The advantages:

1. It helps you build your commercial credit
2. It's usually cheaper than purchase order funding
3. It's less complicated than po funding

Now, not every factoring company offers this. Also, I have over simplified a few points for brevity. But if you are looking for purchase order financing, you'd be wise to compare it against conventional credit enhancements.



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Looking for information on purchase order financing? Read the purchase order finance blog

Retail Sales Still Sliding

As this report from the WSJ shows, retail sales are still sliding. Given that we are now in May, this is problematic as I think that this coming Christmas season may be in jeopardy on two possible fronts:

1. Things recover but stores run out of certain items due to cautious ordering
2. Things don't recover and retailers get hammered, again.

There are three sides to purchase order financing. There are:

1. Commercial sales
2. Retail sales
3. Government sales

Most people are seeing a decline in #1 and #2, but an increase in #3. This is certainly an interesting time to be in this industry. The fact that many companies still cannot get conventional business financing at their local institution are making things easier since there is still deal-flow.

But the fact remains that the retail industry, especially large chains, are a major engine of the purchase order financing industry. Until thing improve in that market, things will be a little bit funky for purchase order financiers.

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Please keep us in mind if you are looking for factoring an purchase order financing in Alabama. We offer factoring in Alabama.

Things are bottoming out

Here is a very interesting article on the Financial Times that talks about how things are stabilizing. In my humble opinion is does not mean that things are going up - just stabilizing. With stability you get some predictability. Predictability is the platform for possible future growth. So this is good.

Many now that the purchase order financing market has taken a bit of a hit since there is heavy involvement in the retail sector. However, other area of it are growing to compensate. And given the current lack of availability of business financing, it remains a viable alternative for companies that cannot get a business loan.

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Looking for information on purchase order financing? Read the purchase order finance blog

Why PO Financing works best with High Margin Transactions

I commonly get calls from companies that are excited about the prospect of using purchase order financing, only to find out that they don't qualify because their gross margins are too low. So why do many purchase order finance companies usually require high margins (20% to 30%)?

There are a couple of reasons:

1. Finance companies consider purchase order financing transactions to be risky since many things can go wrong. Having a high margin enables some things to go wrong, while providing a sufficiently large cushion to soften the impact.

2. Purchase order financing is not cheap. Especially if you compare it against other forms of business financing such as a business loan. Requiring high margins ensures that the owners have a sufficiently large profit margin to make the transaction worth their while

Can finance companies work with orders that have smaller margins. Of course. They can do so on exceptional situations if the transactions makes sense. But be aware that the risk will also be higher.

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Looking for information on purchase order financing? Read the purchase order finance blog

Venture Capital in Problems?

As you can see from this article on the WSJ, the number of venture capital investments has dropped significantly. This is a statistic that concerns me because VC's are an important source of business financing for the economy. Whereas a business loan is usually targeted to an existing business (or an owner with lots of assets), VC's target companies that could grow and go public.

I am actually surprised that VC investments since I always thought that a good time to invest is in a downturn when things are cheap. Let's hope this pick up. At least I am seeing a pickup in the factoring market.


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Looking for information on purchase order financing? Read the purchase order finance blog

Good news from the Federal Reserve

I was pleased to read this morning that fed officials think that worst of the recession is over. At last! After a year of seeing lots of negativity in the press, finally officials (and businesses) show some cautious optimism. One of the problems that exacerbated the crisis has been the exaggerated pessimism. So called economic pundits that appear on TV trying to deliver shock value through bad news. I have always thought that their effect was enourmous - and becauise of that they should act responsibly. I'd like to note how there were not many pundits out there predicting that the crisis would happen - before it happened. This tells oyu a little bit about their ability to predict things in general.

There are two things to remember:

1. Recessions happen. It is what it is.

2. So far, the USA has ultimately always recovered.

I think that we will see thinkgs improve once there is a uptick in business financing activity. An increase in the business credit flows (read: business loan) is what needs to happen before we see any major improvements.

But lets bask in these good news.

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Looking for information on purchase order financing? Read the purchase order finance blog