Today’s chief financial officers should be groomed early on to take on many roles. Many of these roles are functional in nature, vetted in leadership and set the tone and direction for an organization. In the current business environment CFOs are expected to be stewards, operators, strategists and catalysts. Managing so many varied roles makes a CFO’s job more complex than ever. While a CFO wears many hats, given the 2008-2010 financial crisis, many CFOs have also had to really focus on specific roles — or more accurately, imperatives — in the last few years, including liquidity and sometimes even survival.
While a CFO’s job description is to plan, strategize, maintain sustainability and make sure the company has the right team in place, the degree to which all of these hold weight within an organization depends on the life cycle and evolution of the company itself. In other words, one CFO’s job may differ greatly from another’s depending on certain dynamics that the company may be facing at a specific period in time. Sustainability (and even survival) can be a day-to-day task for a CFO tasked with trying to steer the ship for an undercapitalized, fast growing company.
The term “undercapitalized” can be used in many contexts; however, it is always relative vis-à-vis the growth rate in a company’s sales. While a company might maintain a strong relationship with its traditional lender, seasonal spikes in sales can always present challenges without ample internal working capital and supplier credit. Purchase order funding can provide an extra tool for today’s CFO to manage the constant struggle between rapid growth in sales and access to capital in order to sustain such growth.
To best illustrate how purchase order funding can enable today’s CFOs to sustain fast paced growth, let’s examine some common dilemmas facing today’s undercapitalized companies:
1. Seasonal spikes in sales — seasonality is one of the worst enemies for a CFO who is always trying to smooth out sales to accommodate a company’s working capital needs throughout the year. This is an even bigger task for the CFO of a company with significant fixed costs versus a company that can better match variable costs to fluctuating sales. In either case, seasonality always causes traditional lenders heartburn and can make today’s CFO’s job of gaining access to capital that much more difficult.
2. Large growth in sales — a salesman’s dream can be a CFO’s worst nightmare. When the company wins a significant order from a valued customer, it’s time to celebrate! Or is it? If the company is unable to fulfill the large order by delivering a quality product on time, winning an order can sometimes be the worst thing that can happen to an undercapitalized company. If the company can’t successfully execute, they can be certain that there will be no future orders from the customer with which they were so excited to work.
3. Lack of supplier credit — we all know that trade credit is the least expensive form of financing with the most flexible pay back terms. That being said, trade credit can dry up fast and put a company into a dire tailspin which can lead not only to missed sales, but also expose them to the possibility of costly litigation, and sometimes involuntary bankruptcy proceedings.
4. Lack of access to bank financing — the next inexpensive form of financing is bank financing. However, while bank financing is cheap, obtaining it has proven to be a significant challenge for today’s CFOs. The old adage that a bank will lend you money only when you can prove you don’t need it can oftentimes be very true. Even if a company establishes a relationship with a bank, is the bank facility large enough to accommodate high growth? While bank financing is cheap, the indirect cost of collateralization, financial covenants and security interests can negatively impact a company’s ability to sustain growth.
5. The need for additional equity — Equity raises can take a life of their own and prove to be a CFO’s most difficult challenge in maintaining the sustainability of a company’s capital structure. Raising equity is one thing, but the bigger question CFOs have to ask is whether giving up equity will end up being the most expensive form of financing based on the company’s valuation and the amount of ownership (and most importantly, control) the company may have to surrender.
Purchase order funding can be an invaluable tool to help solve the types of dilemmas outlined above. Purchase order funding is transaction-based financing that can be tailored to specific orders and/or seasonality in sales. Access to purchase order funding can enable a CFO to not worry about having to figure out how the company is going to manage the seasonality of the company’s sales since it provides enhancement and a guaranteed form of repayment to a supplier and is incremental in nature to a traditional line of credit in terms of security interests and rights of repayment.
Purchase order funding is not necessarily tied to the company’s balance sheet and/or income statement. Traditional lenders look at free cash-flow, financial covenants and leverage — all measures of how the company has performed in the past. In contrast, purchase order funding takes into account sales growth opportunities the company is facing now and in the future. Purchase order funding can provide financing up to 100% of the cost of goods sold. This allows today’s CFO to focus more on sales initiatives and growing the company’s balance sheet and not be worried about the lack of working capital to execute.
Purchase order funding is a perfect solution when supplier credit has been maxed out or completely gone away. International suppliers demand guaranteed forms of repayment such as cash payments and/or letters of credit prior to goods being produced and shipped. Purchase order funding is an excellent tool to implement a safe and mutually acceptable form of repayment to overseas suppliers of presold goods. Additionally, purchase order funding can enable today’s CFO to demand increased supplier credit in the future by showing good faith and securing payment to keep a valued supplier happy now.
While purchase order funding isn’t necessarily a long-term replacement to traditional bank financing, it definitely provides significant value. Banks don’t like to finance fast growing companies that can’t demonstrate internal liquidity on its own to sustain such growth. Banks focus on historical results and side collateral as a basis for their lending parameters. Banks need time to underwrite, get approval from credit committees, conduct audits and manage their own internal compliance requirements in order to establish new relationships. Purchase order funding provides a quick turnaround solution to immediate sales growth opportunities. Purchase order funding should focus on the credit strength of the end customer, the terms of the sale, the gross margin of the transaction and the company’s ability to execute. Additionally, purchase order funding can provide value to an existing lender by not being forced to take on additional risk to enable its borrower to continue to grow.
Purchase order funding is not dilutive to existing ownership. Purchase order funding is not going to demand a board seat and dictate day-to-day operations of the company. Structure and control of payments to suppliers, control of inventory and control of repayments is a key ingredient to purchase order funding. However, such structure is transactional and delivery specific. While purchase order funding is more expensive than traditional lending, it is meant to be an additional cost of goods sold tied to specific orders and it is certainly less expensive in the long run than giving up permanent ownership and control as well as having to turn down sales opportunities that would contribute to the growth and future of the company altogether.
A CFO’s job is demanding and ever changing depending on the dynamics of the company and its evolution in business. Access to liquidity and maintaining the sustainability of the organization is oftentimes the sole focus of today’s CFO. Purchase order funding is an incredibly valuable resource that a CFO can call on to help execute on profitable sales opportunities when working capital, equity, supplier credit and traditional bank financing aren’t realistic solutions.
Bryan Ballowe, vice president and chief financial officer of King Trade Capital joined the company in 1997. He oversees underwriting and portfolio management and is principal and member of King Trade Capital’s Investment Committee. Prior to joining King Trade Capital, Ballowe was a global financial analyst for Bank of America, underwriting senior debt and high yield bonds for companies in the media and telecom industry.