In order to grow a retail supplier's business, understanding the various funding options available can be a game-changer for companies looking to scale. One option, Purchase Order (PO) Financing, offers a unique solution for businesses needing to fulfill large orders without the immediate capital to do so. To delve deeper into the intricacies of PO financing, we had the opportunity to sit down with Avi Levine, a lending expert who has been with Star Funding for 10 years.
Avi sheds light on the mechanics, benefits, and nuances of PO financing. Through this Q&A, we aim to provide you with a clear understanding of how PO financing works and how it can be a valuable tool for your business. Whether you’re a small startup or a larger enterprise, this discussion will equip you with the knowledge needed to navigate the financial landscape and leverage PO financing to your advantage.
What is Star Funding?
Star Funding is based in New York City and has been around for 25 years and is a lender on the Bridge Marketplace. It has a sole focus on purchase order financing and factoring. We look at how we can help our clients finance up to 100% of the production or acquisition of the inventory they need to sell to their retail partners. We then wait for the retail partners to pay their invoice, and that’s when we get paid back. So, it offers a pretty complete solution to anyone who gets a large purchase order from a major retailer like Walmart.
What is purchase order financing and how can it help Walmart suppliers?
Getting a purchase order from Walmart is a good thing, and usually, people call and say, 'I have good news and bad news. The good news is I got a purchase order from Walmart. The bad news is I got a purchase order from Walmart,' and they now need to find a way to finance it.
This is where we come in as a very transactionally focused lender. We are less concerned with the balance sheet, profit and loss, or the 10-year history or personal credit of an organization. Instead, we are looking at your buy and sell. For example, you are buying a widget, bike, electronic product, or whatever it might be for $1.00 and selling it for $1.50. To us as a financial institution, that sounds like a great deal, so we can help you finance the purchase of these goods for $1.00. When you deliver them to Walmart and invoice them for $1.50, we know our principal is secure, and we will get paid back because we can rely on Walmart to pay their invoice.
Most lenders, in a more traditional sense, will look at your business and say, 'Okay, your business is doing X amount of sales, X amount of profit, X amount EBITDA and we will give you X amount of dollars based on what we feel could be paid back in a reasonable period of time.’ Some large institutions or fintech companies may want to turn things over quickly and use rapid data and calculations to determine what you should be eligible for. However, we spend the time digging a little bit deeper into the business to understand the logistics of what it will take for you to procure these products and get them delivered on time and in the right quantity and quality. This way, we can be reasonably certain that Walmart will pay their bills in the end.
When you compare what we do versus a more traditional lending institution, we have the understanding, knowledge, and experience to say, 'Alright, here’s your purchase order, here are your products, and here’s what it’s going to take to get those products delivered.' We have expertise on our team from areas such as production, manufacturing, logistics, and getting goods imported, so we can see how goods are landing then paid for. On the purchase order funding side, we look at that specific transaction and say, 'Great, we are going to help finance the production of these goods to get them delivered to your customer.'.
What is the process like? Let’s say one of Walmart’s suppliers got a purchase order yesterday and comes to you saying let’s start working together, what are the next steps?
The entire process usually takes between 7-10 business days to onboard a new client. Once they are officially a client of Star Funding, we can start financing their orders. If someone called me on a Monday and said, 'I need this done by Wednesday,' we have done it before, but it requires everyone to drop everything, go all hands-on deck, and move very quickly.
From the day we have the initial discovery call with the client to understand if this is a great opportunity for both of us and a good fit, we will send out an application to learn more about the business and the individuals running it. We will collect some basic information, such as a balance sheet, P&L statement of the company, accounts receivable aging report, and a brief history of the retailers they are working with. Although we are not using that information to make our financing decision, it forms the foundation we will examine.
Just like when you buy a house, you check the basement to ensure everything else is stable, we will ensure they have proper record-keeping and that there are no competing loans or outstanding issues for the business. If there are, we will come up with a game plan to solve those. Once we get that information, we will turn around a proposal or term sheet the same day. Once that’s agreed to, they will sign the term sheet and send it back.
Then we will move to our official due diligence stage, which takes about 5 business days to complete. We conduct corporate searches, background searches, searches for judgments and liens on the business, and prepare the financing agreements. These are usually sent out on the third to fifth day after receiving the term sheet. Once we get those documents signed and returned, we are ready to go and start setting everything up for the payments.
After someone becomes a client, we enter the funding stage and conduct a quick transaction review: you're buying this product for $1, you're selling it for $1.25, great, you have a profit margin. We also address any potential concerns in the supply chain to ensure everything goes smoothly.
From that point, we either issue payment directly to a factory or issue letters of credit to start production. The goods are then imported and delivered to Walmart. Once you invoice Walmart, we factor that invoice and if eligible, provide an advance against it.
What documentation do you require?
It is really pretty basic. What we look at is the transaction. We know with pretty good certainty that if you get a purchase order from Walmart and you can deliver those goods, you are going to get paid for it. So, we are less concerned with everything else happening in the background. As a non-bank transactionally focused lender, our underwriting process is different than your traditional bank.
We look at the balance sheet, P&L, AR aging report, and maybe the last year-end financials if they are relevant and available. We also examine the purchase order from Walmart and the pro forma invoice from the supplier from whom we are buying the goods. This tells us everything we need to know.
In the due diligence phase, we will collect a photo ID from the principals of the company, have them fill out a personal financial form, and conduct a background check. This gives us the comfort of knowing who we are dealing with and their background. If someone has bad credit, we are okay with that(within reason). As entrepreneurs, we put our blood, sweat, and tears into the business, and many of us have bad credit for that reason. However, if we see a pattern of bad credit behavior over the last few years, it indicates that this history might repeat itself. We will be extra cautious, put up some extra guardrails in the transaction, or decide that despite loving the product and what the client is doing, their history of walking out on bad debts or not respecting obligations is a major concern.
So, it ends up being document-light in terms of the information it takes for us to bring on new clients. We focus on the transaction, and if we can underwrite that transaction comfortably, we will do everything we can to get in there and help the vendors.
What is the requirement of personal guarantees?
We do require a personal guarantee. For us, the personal guarantee represents the owner of the company saying, 'I too am just as confident in this transaction as you should be,' and that lets us know we are in this together. Things happen—products show up late, the order gets a huge discount, or it doesn’t sell through as it’s supposed to, and they get a discount, or whatever else could happen as a vendor to a major retailer, and we end up falling short. But as long as there’s constant communication and everyone is on the same page, we know there’s a plan to get out of it.
We discuss who else we can liquidate the products to and who else you are selling to. If we are $5,000 short on this transaction, we make it up on the next three or four and have a plan in place. Some traditional lenders might require a personal guarantee and then file a mortgage on your house, a second mortgage, take a lien on your investment accounts, or take a lien on other assets you have. We do not typically do any of that. Again, our focus is on the transaction, not on someone’s personal assets. If the deal makes sense for us, we go for it. The personal guarantee is more about knowing that you will be there with us to get this transaction done successfully.
Are there options of using the POs as a guarantee for the funds because they already have a line of credit that has all the AR?
PO financing is really geared towards buying the actual product that is going to be delivered to the customer. If someone needs to buy, for example, a piece of equipment, we won’t leverage a PO for, let’s say, potato chips to buy a potato chips machine for them to deliver it. We are going to finance the actual production or acquisition of those potato chips to a third party. Or, in some instances, it’s also in-house. When leveraging a PO, the cash is going directly towards the supplier of that product or the components of that product.
When there’s already another lender in place, like a factoring company or an asset-based lender financing the invoices, that’s okay because we will establish an intercreditor agreement with them. This agreement says, 'Hey Mr./Mrs. Lender, as soon as this invoice is presented to you from the products we financed, give us that advance instead.' That’s when Star Funding gets paid back, so there’s really no confusion. It’s all laid out in an intercreditor agreement, making it very clear: the lender continues their business as usual until they get the invoice from the goods we produced. Instead of giving that cash to the client, they give it to us.
What is the right time for people to come to Bridge or Star Funding and get engaged?
It is a bit of a chicken and egg scenario for vendors, they think ‘I can’t go to the lender today because I don’t have the order in hand, or I tell Walmart I don’t think I can take this order because I don’t have the financing. So, it’s like, what do I do?’ I’ll give you two examples of what could happen. Right now, we are working with a client who had an order that was supposed to be shipped in early January. We just got engaged with them about two weeks ago, and it really came out as their inability to find the appropriate lender to help them. They came to us and said they had this order, it was late, and they were having an issue because they could not find the financing. So now we can say, 'We will help you, but you have to talk to Walmart today and say, "Hey Walmart (or whatever retailer it is), I found the financing I needed, but now I need this purchase order pushed out to a later ship date so we know the goods will be accepted."' In those instances, we can certainly help, but it ends up being very stressful.
This morning, I heard from a new potential Walmart vendor who is expecting an order upwards of $3.5M for some products they want to sell for the holidays. They’re delivering these products in August and September, and one of the questions was, 'How do we get the financing set up because I need to confirm with Walmart that I can handle this order before I actually accept the purchase order?' They had a conversation with their buyer and the team, and said, 'Hey, we appreciate this order. We didn’t think it was going to be so large, but we don’t know if we can finance an order of this size.' Walmart’s response was, 'Let us know what you can handle to have delivered by the holiday, and maybe we can just scale down the program a little bit or make it more reasonable.'
For them, it was a great conversation with Walmart because they’re your partner in this, and your lender is your partner in this. You must make sure, as the middleman, that everything is in order. So, to answer the question, it is never too early to speak with a lender or a finance company to understand your options. It’s not a bad thing to be transparent with Walmart and say, 'Hey, I need to figure out the financing before everything’s finalized in this order,' and have them share the details of their expectations for delivery dates, dollar amounts, or whatever else might come up in your conversation with the lender.
That’s how you’re going to ensure you are successful. You have to be transparent. Walmart doesn’t think that none of their vendors have financing. Walmart has financing, so it’s okay. You are supposed to leverage your business and make it easy on yourself. I think it’s a matter of being transparent, and it’s never too early to figure it out with a lender.
Will you share a success story?
One story that really comes to mind is about a company that sold cleaning chemicals. It was pre-COVID, and they were in the process of developing this all-natural cleaning product. It turns out that this cleaning product was excellent for dealing with COVID and cleaning offices, retail stores, and everything else.
They came to us and said, 'Hey, we have a purchase order from Walmart, and we need $1M for just 60 days to fill this one order, and then we won’t need you anymore.' So we said sure, we can help you out. We got them onboarded and into the system, and something happened. Walmart got really eager for their product, so I think they might have prepaid for it, which is not something they ever do for products. But in this emergency case, they made an exception. They said, 'We need these products, and we want to be at the front of the line.' The company replied, 'Well, if you want to be at the front of the line, prepay for them.'
Their next largest customers were Home Depot, cruise ships, and several other groups. Within about 30 days, we increased the line from about $1M to $5M. In the next 30 days, we increased it from $5M to $15M, and they did about $160M in sales in a 6-7 month period with these products. Without purchase order financing, this never would have been an option for them. They would have still been sitting there trying to find the $1M to fill the one order they had from one retailer. But because we were behind them, and due to the incredible need for their products, generated by what was happening in the world, they were able to take every order, knowing they had our support to finance the purchase of these goods.
That was a pretty wild success story. This gentleman must have walked away with tens of millions of dollars in profit in a 6 or 7 month period, and because we were there to support it, it kind of made it possible, which was pretty cool.
What is the average rate you give on loans?
The biggest difference between us and an MCA or some of the other types of loans that people receive is not so much in the rates, although they are different, but in the process and the mechanics of it. If you have to borrow money today and start paying it back tomorrow, but you’re not getting paid from your customer until the goods are produced for two months, on the water for a month, and then 30-day payment terms, then there’s no money to pay anything back during that time. Typical term loans, cash flow loans, merchant cash advances, and other similar products really don’t support that specific need. So, the biggest difference is in the mechanics of how it operates.
In terms of pricing for purchase order financing, it's going to be anywhere between 1.5% and 3% for a 30-day period of our support in supplying these goods for delivery. The rate is determined by the size of the transaction, duration of the transaction, margin of the transaction, and complexity of the logistics of the transaction.
Where there’s a lot of heavy lifting, you’re going to see the higher cost for financing. We don’t look at it so much as, 'Here’s a loan based on the quality of your business,' but rather, 'Here’s a transaction that you’re presenting to us, and here’s what it’s going to take to finance it.' So, when a vendor is looking for this type of financing, the proper way to view it is as part of their cost of goods sold. They should include their financing cost in the product price. For example, if they are buying a product for $100, they need to include another $2 to $4 for financing, just like they would for shipping. This financing cost on the production side should be considered when calculating margins for selling the product. If they don’t, they risk falling short.
How Bridge can help
There are 4,500 different lending institutions in the US, and Bridge Marketplace is here to help you determine which one is best for you. We have established relationships with various types of lenders, including PO Financing lenders like Star, so if you're trying to decide who to work with, we are happy to give you a range of options.
Disclaimer: This blog post is for informational purposes only and does not constitute an offer to do business or a commitment from Star Funding or any of its representatives. The content is intended to provide general information about purchase order financing. Examples provided are illustrative, and the terms, processes, and offers mentioned are subject to change without notice. Please contact Bridge directly for the most current information and specific business inquiries.