When the Bank Says No, Where Do You Go?

Posted on 19. Feb, 2010 by Adam in Making Money

Not long ago, if you had a need for financing and your business finances were in good shape, it seemed banks would line up to get the funds in your hands. Those days are all but gone now. Small-business lending has declined sharply in recent months, with Bank of America, the largest US small-business lender, cutting their lending in this sector by 6.2 percent during the seven-month period ended in November. Overall, US banks reduced their lending during the same period by $12.5 billion.

What this means for some small business owners can be a scenario that would keep anyone up at night. Imagine having to turn down an order from Costco or Wal-Mart because you don’t have the funds to produce the products they’re requesting. Even if on a smaller scale, it is disturbing to say the least to turn away any business due to lack of working capital for production. The good news is that, for many businesses in this position, there is a solution. A growing sector of the financial industry is saying yes to small businesses where banks are saying no.

What is Purchase Order Financing?

Companies such as Hartsko Financial provide financing to companies that have a purchase order from a creditworthy customer. The PO financer is more concerned with the financial strength of your customer than they are with that of you or your company. They will request a Letter of Credit (LC) from your customer and issue an LC on your behalf to the producer of your products, whether domestic or international. In this way, your finances aren’t as much in play, because they are facilitating the transaction at both ends. Basically, if you can prove you’ll get paid, they will send a letter of credit to your supplier. When you complete the order, the customer pays them, and they send the proceeds to you, less a percentage for their efforts.

The Price Tag

PO financing doesn’t come cheap. At Hartsko and other established firms, like Dallas-based King Trade Capital, Expect to pay as much as 3.5 percent for the first 30 days, and 1.25 percent for every 10 days thereafter. The quick math points to an annualized percentage north of 40 percent, which is obviously significant. So be sure your ducks are in a row and the order process is short enough to be able to pay the PO financer back quickly. If it’s going to take more than 60-90 days, this might not be the solution for you.

While pricey, this sector of the financial industry has grown significantly over the past year, largely because, for many small businesses, it’s the only solution that will allow them to fulfill large orders, expand into new markets, or start up in the first place. If you think it’s a good solution for you, do your research, solicit feedback from others who have tried it, and let us know how it goes.

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11 Responses to “When the Bank Says No, Where Do You Go?”

riscphree

19. Feb, 2010

Don’t forget about peer to peer loan programs such as http://www.prosper.com

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Ballet Moves

19. Feb, 2010

Great information.

I’ve found one of the most difficult hurdles for many small business owners is that of cash-flow. And unless you’re able to bring investors on board early on in the piece, it can be very difficult.

In Australia, there’s growing support for small businesses, financially speaking, with the major banks becoming a little more lenient in their lending capacities, but even then, it can still be difficult.

I really enjoyed the post, thanks for the info.

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how to start a blog

19. Feb, 2010

Adam, have you heard of a corporate credit builder program that guarantee a $50k to $150k credit line at the end of 3 month period? This is w/o personal guarantee!

They pretty much do everything (even incorporate new corps) for you for less than $2k. Sounds too good to be true IMHO.

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rosario

20. Feb, 2010

Explanation very well, thanks :D

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tattoo kits

21. Feb, 2010

Thanks for the heads up on this – very good to know

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Legitimate Work From Home Jobs

22. Feb, 2010

I think the belts are loosening a bit for small business loans. Family members are a good resource for small loans, provided all the terms are agreed upon and recorded in writing up front.

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Laptop Briefcases

01. Mar, 2010

I was not aware of this type of funding. It is something that I will have to keep in mind if I am ever in that situation. It sounds like it could be a lifesaver to a business who absolutely needs funding to fulfill a large order.

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Better Parenting

08. Mar, 2010

When lending requirements tighten, it’s a good time for business to consider the amount of financing that they really NEED vs want. In many cases, by cutting out some of the non-essential planned spending, you can reach a point where your proposed loan is more enticing to a bank, or where you can find other means to acquire the needed funding.

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Wall Decals

11. Mar, 2010

Thank you very much for this great information. I have been in need of short term money solutions such as purchase order financing. We have had to do the friends and family thing on a lot of deals. It has worked out but not a great solutions.

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Dress Sandals

22. Mar, 2010

With new bank lending policies, getting funding may become tougher than ever. So it is important to keep options like this in mind. Unfortunately this type of financing only applies to very select companies. Your company needs to be at an in between stage to be able to secure a large order while not having the financing to complete the order. Usually when your company is successful enough to secure large orders, you have better rate financing available.

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chalikovas

20. Apr, 2010

good information Thanks for sharing

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When the Bank Says No, Where Do You Go?

11 Responses to “When the Bank Says No, Where Do You Go?”

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