Page 199 - Finance for Non-Financial Managers
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                                      Finance for Non-Financial Managers
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                                   Certain kinds of companies use factoring as a normal busi-
                               ness tool, perhaps because they have not been sufficiently well
                               financed from the beginning or because margins are so thin that
                               they have been unable to earn enough profits to build a working
                               capital base. The U.S. garment industry, populated by many
                               small, creatively driven businesses, is an example.
                               Honorable Mention to Some Other Short-Term Borrowing
                               Techniques
                               Flooring—buying inventory without paying for it until it’s sold.
                               This is a little like consignment buying, commonly used years
                               ago to induce retailers to carry products they didn’t want to pay
                               for until they sold. The difference? Flooring is a financing
                               method for high-ticket items like cars and boats. Dealers cannot
                               typically afford to pay for a showroom full of inventory, so they
                               borrow against the inventory, item by item, and pay off the loan
                               when they sell the item. They pay the lender—such as GE
                               Capital, a bank, or a finance company—interest (the “flooring
                               charge”) based on how long they held the item on their premis-
                               es. Financing plans can include only inventory or a combination
                               of inventory and receivables.
                               Inventory financing. This is another way to use inventory as
                               collateral. It’s possible to obtain financing using the inventory a
                               company owns as collateral, but it isn’t easy. It must be possible
                               to sell the inventory readily if necessary, which means that only
                               certain kinds of raw materials and finished goods will qualify.
                               Even then, the loan amount will be limited to 50% or so of the
                               inventory value and the lender will often want additional collat-
                               eral as well. Inventory can be hard to liquidate if the borrower
                               defaults on the loan, so the lender has greater risk of loss; con-
                               straints on inventory lending limit the lender’s potential losses.
                               There isn’t much of this kind of lending today.

                               Purchase order financing. This is going factoring one step bet-
                               ter—or worse. A company that wins a large customer order that
                               it doesn’t have the cash to fulfill can borrow money on the
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