Working as a CFO in the garment industry, Richard Eitelberg learned about life as a borrower. When business volume was down, he had the challenging job of trying to convince small business owners to reduce their overhead — a hard sell to the old guard in the garment business. Often, after ignoring his initial advice and finding themselves in financial trouble, they turned to Eitelberg for another solution. Eitelberg’s discovery of purchase order financing not only saved his clients’ businesses, it also led him to a new career.

“The problem with the garment center is that when business slides back in volume, you have to equally slide back in overhead. But the old garment guys didn’t understand that and had the mindset that they could keep spending and just hire an extra salesman to make more sales to cover the overhead, and that never works. In the process of taking on smaller clients, that’s when I started learning about purchase order (PO) financing. I first heard of it in 1996,” explains Eitelberg, president of Hartsko Financial Services, which he founded in 2004.

Filling a Void

Because so many business loan requests are met with a resounding “no” from the banks, Hartsko’s PO financing has become a reasonable option for companies in need of up front capital. Eitelberg is not concerned with a potential client’s financial and credit history. He focuses instead on the viability of the transaction in question.

“We look for transactions that make sense, meaning we look for retailers that we are selling to, whether it’s a big store or a small store, that are credit-worthy customers of our client. We look for good margins. We want our clients to make money… Everything we do is backed up by a factor. There is always a third-party take-out — a factor, an ABL, a bank.”

Hartsko serves not only customers having financial difficulties, but also startups that are unable to secure a bank loan and profitable companies that cannot receive the financing they need to grow. Many of Hartsko’s clients are referrals from brokers and factors that are not in a position to finance these businesses up front.

“Banks talk about loosening the reins, but they haven’t, and people who have viable businesses or a company that’s in startup mode, they have no chance because banks will not look at them. We’re able to pick up customers like that. And we have customers who have gone through tough times, business has gone down a little bit and they haven’t reduced their overhead as fast as they’ve reduced their sales, and they run into situations where they need capital. And we’ve got companies that are in growth mode. The banks have been able to support them to a certain level, but once they reach that level, banks are no longer able to support them.”

Eitelberg explains that if a factor or ABL tells him that the purchaser holding the order is unreliable, then Hartsko will not undertake the transaction. Nonetheless, he says he finds plenty of feasible transactions, both one-off deals and ongoing ones.

Based on his motto: “A question never asked is a question never answered,” Eitelberg strives to educate his prospective clients about PO financing, especially the misconception that it is more costly than factoring.

“It’s very funny that everyone likes to spout off that factoring is cheaper than PO financing. But when you analyze the percentages, it really doesn’t work out that way,” he explains. “Let’s take a scenario where I’m charging 3% and a factor is charging 3%, and let’s say we’re talking about a 30% margin. I’m at 70% of the selling price. I’m charging 3% on the money. Let’s say we’re taking about a 30-day transaction. The rate I’d charge is $2,100 on a $100,000 transaction. You take the factor, but his 3% is on the selling price, so now he’s charging $3,000 on a $100,000 transaction. On top of that, he’s not giving the client 100% of the $100,000, he’s giving $80,000, an 80 % advance. He’s giving you $80,000 and giving you 3% on the $100,000, so when you take the $3,000 and divide it by the $80,000 that he advanced, he’s at 3.375% for the same rate where I’m at 2.1%.”

He adds, “You see how it separates itself. It’s very important to understand that PO is fee-based and that it’s not a revolving type of loan. This is a transaction itself, and we base a fee on the transaction. And once the transaction is paid off and done, we close it. We can run several transactions at the same time, but it is separated out like little loans for each deal.”

Hartsko’s rate vary between 3% to 5% range per month. Hartsko does not charge a minimum, demand all of a client’s transactions or lock clients into long-term contracts. Most loans are repaid within 60 days. Eitelberg projects that Hartsko will lend more than $200 million in 2011, up from $150 million in 2010 and $84 million in 2008.

He emphasizes, “If the guy had a bad year, we’re not concerned about that, we’re locking ourselves into the viability of the transaction. We can keep this guy’s business going by doing these transactions, and we allow it to grow. If he comes to me today and needs $100,000 and comes to me next week and needs $1 million, I have that money for him. And you can’t go to a bank and do that. The bank is going to laugh at you. What you get from us is flexibility… If a client has a deal, and without my funds he can’t do the deal, at this point he is at zero. Anything he makes on that transaction is better than zero, it’s better for him. We may take a small piece of the transaction, but for the client who has no ability to get it done without us, we are a good, viable source.”

Desperation & Due Diligence

While the general nature of the transactions Hartsko finances has remained fundamentally unchanged, the emotional state of many of his clients has. Eitelberg describes this change in one word — “desperation.”

“I don’t think the deals overall have changed. I think the desperation level of some of the clients has changed… I get deals where they have been out there for five months looking for financing, and I get them when they have two weeks left before they have to get to the store. I think the come-to-reality is that if people knew more about us … and more about what we do and really understood it, they’d stop wasting their time [seeking bank financing]. We provide for the client who doesn’t have any capital and is left with two choices: he finds his angel investor or he finds us. We don’t take any equity in the deal. We’re taking equity in the transaction as a fee-based type of thing. He walks away after the transaction owning 100% of his business. Everything we do is based on the actual buy. The bigger the margin, the cheaper my cost to the client.”

Because Hartsko has seen an increase of potential clients in the desperation phase with few financing options left to save their business, Eitelberg insists on a thorough due diligence process and charges a fee of $1,500. He stresses that the PO professionals must carry out a substantial amount of up front work prior to funding a deal. In addition to the requisite paperwork, Hartsko performs background checks on the stores holding the purchase orders, vendors that supply the client with the product and the clients themselves.

“What has changed in the industry is that people have become more desperate. Because of that, due diligence is that much more important… We spend more time analyzing transactions, making sure that we’re not missing anything as to why we should or should not be doing the transaction,” Eitelberg explains.

The Future of Hartsko & PO Financing

Even if the economy improves, Eitelberg does not anticipate his business falling to pre-2008 levels because, in his estimation, banks are unlikely to relax their lending parameters. He notes that as long as the banks are unwilling to lend, even if they have the money, business owners in need of up front capital will seek PO financing.

“If I put $100,000 on a table and put a glass cover over it and lock it, you can see the $100,000, but you can’t get it without my key. If I don’t make it accessible for you to get the key, you aren’t getting the $100,000. And that’s where you stand with the banks. The government said ‘we’re putting money out there,’ but the truth of the matter is unless the banks give you the key, you can’t get the money,” explains Eitelberg.

With the prospect of steady business in the United States and, backed by a solid relationship with its bank and investor partners, Hartsko is looking to expand into new markets. Already lending in Canada, Eitelberg has initiated conversations with firms in the UK. He prides himself in “getting out there in the public with smaller clients.” Although capable of financing transactions in the millions of dollars, Hartsko also is willing to handle the $50,000 deal.

“We want our clients to make money and succeed. There’s nothing better than to get a call from a client who tells me he found a bank willing to finance him at 6%, and it’s time to move on. I do whatever I can to get him out as quickly as possible to get him better financing. We want people to be happy while they’re here. Most of my clients will tell you how I’ve helped them stay alive in business and grow at times, and how I helped them graduate to a cheaper finance perspective that they never would have achieved without us,” says Eitelberg.

Lisa M. Goetz is an associate editor of ABF Journal. She started with Xander Media Group, the parent company of ABF Journal, in February 2011.