Alternate Advance: Purchase order funding helps build a bridge to growth
by: Chris Kuroda
It’s a classic “too much of a good thing” scenario: An emerging outdoor company makes killer products, grows a devoted fan base and starts gaining space on retailers’ shelves. Then comes “The Order” – a commitment from a retailer willing to purchase a significant amount of new product. Suddenly, the emerging outdoor company has to figure out how to pay the short-term costs of producing and delivering “The Order”.
Small-to-mid-sized manufacturers often struggle with finding money to keep the company growing in that period between closing a preseason order and delivering the products to the retailer. Many companies in that position simply sell off their hard-earned equity – a quick fix that delivers an infusion of cash but often comes with long-term drawbacks and loss of entrepreneurial control. Other companies, such as Utah-based Saga Outerwear, have turned to more creative types of short-term financing – in particular, a program called “purchase order funding.”
Popular in other markets and industries, purchase order funding is an emerging trend in the outdoor market. At its basic level, PO funding is an advance of money paid to a company’s supplier so the company can fulfill a customer’s order. It doesn’t involve a bank loan or surrendering ownership, and the average loan period is about two months.
“We were selling direct-to-consumer only, but there was a demand for our product at the wholesale and retail level,” said Andy Mallett, CEO and co-founder of Saga Outerwear. “We were at a point that we simply couldn’t finance our growth on our own. We could get a smaller line of credit from a bank, but that wasn’t enough to produce our goods in Asia, ship them to our wholesalers and retailers and then wait for payment after delivery. We needed to find a way to generate revenue.”
Saga teamed up with California-based Gateway Trade Funding, one of the leading purchase order financing companies operating in the outdoor industry.
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“We were introduced to Gateway by a conventional bank that turned us down,” said Mallett. “It worked out well. Gateway allowed my partner and I to maintain ownership in our company through a high-growth phase. Yes, debt financing can be expensive, but it’s a lot cheaper than selling your equity.”
Ned Post is Gateway’s Business Development Manager for Outdoor Markets. He came to the financing company after more than 20 years as the president of Smith Optics and understands outdoor buyers, outdoor consumers and the pace of overseas production of goods.
“The outdoor market is the perfect place for purchase order funding,” said Post, who points out his company is an Outdoor Industry Association member. “Companies need to be focused on the parts of their businesses they do really well. That includes product innovation, brand building, marketing and sales. Purchase order funding allows a company to stay within their core businesses competencies while knowing their production and delivery costs will be paid for. It’s a way to do what you’re good at and not give up your ownership.”
Purchase order funding isn’t new, but according to a story in Entrepreneur, lenders say interest in PO loans began to increase after regulations on bank lending tightened during the Great Recession. Before 2010, there were only a few active purchase order lending companies operating nationwide, but as the economy rebounded and conventional banks got stingier, the option became a go-to for companies looking for help in financing through a growth stage.
Now, more companies in the outdoor industry are opting in.
“PO funding does not come from basing our decision to lend money on a manufacturer’s credit score,” said Post. “Purchase order funding looks very closely at the transaction being financed and who is paying the purchase order when those goods are delivered. Because of that there is no one-size-fits-all solution. It’s really a unique, customizable lending program that works well with the size and kind of companies that make up the guts of the outdoor industry.”
Mallett said he’s heard of larger companies using purchase order financing, particularly those whose sales are seasonal, like so many mainstays of the outdoor industry.
“The sweet spot, I think, is those younger companies that are still growing,” Mallett said. “The balance sheet may not be in the best shape, and the banks aren’t real interested. In that case, PO funding really is a great alternative.”
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