WHY PURCHASE ORDER FINANCING AND LETTERS OF CREDIT HAVE BECOME SAINTS AMIDST THE EVILS OF “THE GREAT RECESSION”
BY RICHARD EITELBERG, CPA, FOUNDER-PRESIDENT OF HARTSKO FINANCIAL SERVICES, LLC, A SEVEN-YEAR-OLD PURCHASE ORDER FINANCE FIRM WHICH HANDLES ABOUT $150M IN ANNUAL TRANSACTIONS, BASED IN BAYSIDE, NEW YORK (WWW.HARTSKO.COM)
“The Great Recession” has left a lot of asset-based lenders and factors weak and lame. Their inability during this period to access credit lines from banks, hedge funds, and equity investors often means they must restrict money to existing customers or refuse prospective clients.
Purchase Order Financing and Letters Of Credit generally looked upon as a last-resort bitter pill have seen increased acceptance as a way for a business owner to preserve a transaction opportunity. With up front honesty, PF is expensive because of the very high risk issues involved and the intensive servicing requirements. However, if a deal has the potential to yield a 30% profit or more—why should the business owner be concerned about sacrificing a few more percentage points over and above a traditional lender? Is losing the opportunity to do the deal altogether, a better alternative?
Factors and asset-based lenders should realize that if they are at the end of their line with their client, referring the PF route can keep their relationship and income opportunity alive. PF is a fast way for their client to secure funds needed to fulfill customer purchase orders and expand their business without giving up equity or trying to borrow additional funds (an option which no longer exists).
Here’s the process:
1. The customer submits a purchase order to the client with all documents
2. The client submits the customer purchase order to the PO financier for approval with all costs associated with transactions
3. The PO financier will then will make direct payments to the client’s vendors so that the merchandise for the customer PO can be produced
4. The client’s vendors deliver final product directly to the end customer or to a third party warehouse until shipped to end customer
5. The seller then invoices the shipment and sends invoice and corresponding copy of customer PO to the factor
6. The factor funds the invoice at his discount, paying the PO financier their loan plus fee
7. The factor (or bank) collects from the end customer and pays the client their residual left from the advance
PF is taking a piece of equity in a client’s deal on a temporary basis, perhaps, thirty, sixty, ninety days, or 120 days. A PF firm earns a fee on a precise part of the deal. The PF firm doesn’t really “lend” a business money. Most times, PF firms do not actually give a business any money or hard cash. The PF firm’s money and equity backs up and supports the integrity of said purchase order. It makes transactions work by opening up an LC usually overseas to procure merchandise, products, and materials for businesses. (Or, wires are sent to domestic manufacturers to make purchases in behalf of businesses.)
PF is only transactional and temporary with the money going to fund the goods or merchandise in that specific transaction. PF funds are not allocated to fund payroll, rents, cars, or any other business operations. Therefore, PF enables start-up companies to grow and troubled companies to survive. Even bankrupt companies are generally able to access PF because the fees are guaranteed by the court.
Finally, in terms of the relationship, PF firms are not offended that a business owner may use this process one day, while returning to the factor or traditional lender the next day. The PF community recognizes that PF is only going to be used when it is absolutely necessary and all other lender options have been exhausted. The PF firm accepts that business owners and their lenders will only use it when they need it!
For more information on purchase order financing, feel free to visit www.Hartsko.com, or contact the IFA directly.
More about the author.
Richard Eitelberg is the Founder, President of Hartsko Financial Services, LLC., with offices in Bayside, New York and Deerfield, Illinois. Mr. Eitelberg, was graduated from Michigan State University with a BA in Accounting. He earned his license in certified public accounting (New York State).
Mr. Eitelberg has been the Chief Financial Officer for two garment industry companies: Adrian Landau Designs, and B. Lucid. He was a Senior Auditor for Josephson, Luxemborg & Kantz, CPA’s, PC. He began Hartsko about seven years ago, assembling a group of private equity investors. Today, Hartsko handles purchase order financing and letters of credit with some $150m in annual outstandings. (www.hartsko.com)
Mr. Eitelberg, a resident of Plainview, New York is a member of the Commercial Finance Association, the International Factoring Association (preferred vendor) and the Turnaround Management Association.