Commercial Factor Q&A: A Deep Dive on Purchase Order Financing with Mark Polinsky

In an exclusive Q&A for Commercial Factor, Mark Polinsky, principal of Gateway Trade Funding, provides an in-depth overview of the purchase order financing market, including a look at challenges in the supply chain, an exploration of the partnerships between PO financiers and factors, an examination of PO financing to personal protective equipment suppliers and more.

What are some of the most difficult challenges facing the supply chain right now and how can purchase order financing help?

Currently, we are experiencing some significant delays with transportation issues including, container shortages, vessel space, equipment availability, and port and rail congestion. Suppliers are looking for payment as soon as possible upon shipping, so the cash cycle has expanded.  The time between paying a supplier and collecting from customers has increased, tying up needed working capital or impacting credit terms with suppliers. By utilizing PO financiers to fund presold inventory, funding is released to purchase regular in-house inventory where needed.

We recently covered a deal Gateway Trade Funding worked on with a factoring company. What do you find to be the keys to working in partnership with a factor to supply PO financing for a client?

Communication is key. If we are aware of any issues, we want to ensure our partners are aware of them as soon as possible, and we would like the same in return. We have great relationships with our factoring partners, and trust is an essential element of our collaboration. We treat our partners as an extension of our own business. We assist them by providing information to help with their funding decisions for the client, which is not limited to bad news. We have advised them of large orders that we know about or orders with new customers that we have dealt with in the past where we had great outcomes. This information is needed when factors look to provide little extras such as overpayments/over advances or extended terms.

Our import/export knowledge, especially with documentation, has helped factors when there have been disputes. We are very close to the product and know where it is at all times. Once the goods have been delivered to the end customer, we can show all paperwork to support this, helping overcome any delivery discrepancies.

Many situations require goods to be inspected before they leave the port. These reports are made available to the factor should they be needed. These reports can focus on any required aspect of the goods, including labeling, ingredients, quality and quantity. These reports can be relied upon should the need arise and are available to our factoring partners.

The client in that deal broke into the personal protective equipment space recently. What were some of the unique aspects of this deal and with working within this kind of industry?

The client was introduced to us by their factor, who had a great experience with them historically, but as with many businesses in the past year, the client had diversified to selling PPE and required PO finance. The unique aspect here was that the supplier required payment in advance of shipment, which the client provided, and we shortened the cashflow cycle by reimbursing the client upon shipment.  The nitrile gloves were purchased by a Mexican customer that had a U.S. company guarantying the debt, which our partner factored to repay the PO facility.

PPE has undoubtedly been a challenging product to finance. At the beginning of the COVID-19 pandemic, counterfeit goods were sold and seized by the U.S. government, and the size of orders was huge. Many were not firm orders but promises to order if the product could be supplied. It was the “Wild West.” To fund these facilities, it was vital that we investigated suppliers and thoroughly reviewed the paperwork in detail from start to finish. Many prospects had never sold the product before and saw the orders as lucrative without understanding the risks. Many were turned down due to the profiteering element. Alternatively, other deals we saw had lower margins, as goods had to be expediently delivered and air cargo is much more expensive than ocean freight. 

I know PPE funding has been a major initiative for many specialty finance companies in the last year. Are you still seeing a lot of activity in this space or is it beginning to wane?

It has undoubtedly declined, and current requests for funding PPE have been more realistic. We were inundated with first-time suppliers, startup companies and others who were all looking to get that one big, profitable order. Thankfully, now we are seeing companies that have supplied PPE for some time, are not looking for funds that are way beyond their reach, and these companies also understand the product. These changes have improved our conversion rates significantly, and we are able to spend less time discussing deals that are not workable, allowing us to focus on the right areas.

How has the demand for purchase order financing developed over the first half of 2021? Do you expect that demand to increase or decrease during the back of the year?

Our facility augments bank lines of credit or accounts receivable financing exceptionally well, as our funding is based on purchase orders and most lenders are not funding this collateral. We expect to partner with more banks and have already seen the leads increase from this introduction source. Most SBA loans are now out of the deferment period, and many businesses are still struggling. Therefore, we expect more of these companies to require extra working capital to see them through this difficult time, especially as the Paycheck Protection Program loans have now been depleted. As I mentioned, the concerns with delays in shipping have improved the demand for finance this year. We expect to see this increasing right now.

Which types of companies typically benefit from PO financing and are there specific companies/industries that stand to benefit the most in the current environment?

Any company that has an order for finished goods from a business that is creditworthy can qualify for PO financing, especially where the supplier requires a letter of credit or wire transfer after shipment has been made as a form of payment. The client does not have the funds to pay the supplier upfront. Our facility does not rely on business owners' credit scores, which also helps, especially with newer businesses.

Industries that we regularly see include food and beverage, packaging, consumer electronics, beauty products, apparel, outdoor goods, school suppliers and home furnishings, to name a few. 

Numerous minority-owned companies supplying the government have been provided PO funding as the size of their orders have grown so much, meaning these companies were unable to fund the purchases themselves. With PO financing assistance, we have helped many of these small businesses grow. We are also able to finance startups and companies that are struggling or are in bankruptcy.