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Transaction Financing – Instant Cash Flow From Invoices

Regardless of business size or stage of development, every commercial enterprise is dependent on sufficient and adequate cash flow in order to grow and prosper. To the owner/CEO, “cash flow is everything”. Whether maintaining existing operations and/or attempting to expand, it can not happen without sufficient cash flow, either internally generated or supplied externally from an investment source (owner equity, bank line, etc.).

Most people tend to think of and measure cash flow solely in terms of timely collecting accounts receivable generated from and after an actual sale. The company then typically uses the receivable as collateral for some sort of financing (i.e., working capital lines of credit, direct sells to a factor, etc.).

There is a prior step offering a readily available source for internal financing – immediate access to capital from existing invoices or purchase orders. This financing provides your firm with the money in order for you to perform an invoice or contract requirement – it not yet a receivable.

Transaction financing provides typically 100% financing based on qualified pre-shipment documents, purchase orders, invoices, and/or contracts, even for international or export/import transactions. The quality of the transaction and its support documentation becomes the determining factor in the deal, not the balance sheet or income statement of the your company.

Typical situations may involve an early stage or mature stage company, with or without any bank credit lines, and potentially even a start-up. In each case, the firm has successfully marketed its products/goods and has a solid sale(s) (and/or has larger or more orders than anticipated). The company needs the money immediately to fund the transaction in order to satisfy or perform the contract.

Generally, commercial banks will usually not be equipped to evaluate a transaction at this early stage and are not prepared to fund these types of high risk endeavors. Since there is as yet no receivable, a factor by definition is not a financing alternative. Supplier financing, absent a track record of sales of sufficient magnitude or frequency, will either not be present and inadequate. In fact, the need for immediate financing help often arises because the supplier has reduced or changed the terms of supplier financing – a very typical situation in wholesale distributor situations. The unfortunate result is that the company has a solid contract/sales opportunity and no way to perform due to lack of financing. In a distribution situation, the lack of financing can be catastrophic.

With transaction or purchase order financing, the level of funding is primarily geared to the quality of the underlying sale, not the overall financial position of the borrower. The quality of the sale and the ultimate buyer as a source of payment, are the prime factors of risk to be considered is giving your firm 100% financing including related shipment costs. If delivery and acceptance of the goods/products depend on fabrication, assembly, or some other revisions/additions by your firm, then the track record of your company in successfully attaining delivery, acceptance, and payment must also be considered.

Typically, transaction financing provides 60-90 days short-term funding (usually at some cap per transaction), often up to 100% payment to the supplier/manufacturer/fabricator of the goods/products. This in turn allows the company to complete and satisfy the contract with immediate delivery/ performance to the client.

Fees or costs to the financing source for this funding may be in the form of an initial charge and/or monthly discount(s) from the proceeds of sale. The cost rate for that discount may vary by transaction based on how long within the 60-90 day period it takes to get full payment from your client and the perceived risks as to payment for the financing.

From the owner/CEO perspective, access to this type of financing (used either singularly or in conjunction with other sources) can literally be the key to real and sustained business success. It can result in greater and larger sales opportunities, faster growth potential, stable cash flow, and increased profits. Most importantly, it builds a solid track record of sales and profitability – both key ingredients for banking and supplier confidence.


* Woodrow D. Wollesen, President, Execunet, Inc., 301-590-1050