One avenue is equipment financing/leasing. Equipment lessors help small and medium-sized businesses obtain equipment financing and leasing when unavailable to them through their local community bank. A wholesale produce distributor’s goal is to find a leasing company that can help with all of their financing needs. Some financiers look at companies with good credit, while some look at companies with bad credit. Some financiers look strictly at companies with high revenue (10 million or more). Other financiers focus on small-ticket transactions with equipment costs below $100,000.
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Financiers can finance equipment costing as low as 1000.00 and up to 1 million. Businesses should look for competitive lease rates and shop for equipment lines of credit, sale-leasebacks & credit application programs. Take the opportunity to get a lease quote the next time you’re in the market.
Merchant Cash Advance
It is not typical of wholesale distributors to accept debit or credit from their merchants even though it is an option. However, their merchants need money to buy the product. Therefore, merchants can make merchant cash advances to buy their produce, increasing their sales.
Factoring/Accounts Receivable Financing & Purchase Order Financing
One thing is certain when it comes to factoring or purchase order financing for wholesale distributors of produce: The simpler the transaction is, the better because PACA comes into play. Each deal is looked at on a case-by-case basis.
Is PACA a Problem? Answer: The process has to be unraveled by the grower.
Factors and P.O. financers do not lend on inventory. For example, let’s assume that a distributor of products sells to a couple of local supermarkets. The accounts receivable usually turn very quickly because produce is a perishable item. However, it depends on where the produce distributor is sourcing. If the sourcing is done with a larger distributor, there probably won’t be an issue with accounts receivable and purchase order financing. However, if the sourcing is done through the growers directly, the funding must be done more carefully. An even better scenario is when a value-add is involved.
Example: Somebody is buying green, red, and yellow bell peppers from various growers. They’re packaging these items up and then selling them as packaged items. Sometimes, that value-added process of packaging, bulking, and then selling it will be enough for the factor or P.O. financer to look at favorably. The distributor has provided enough value-add or altered the product that PACA does not necessarily apply Page Design Hub. Another example might be a distributor of produce taking the product, cutting it up, packaging it, and then distributing it.
There could be potential here because the distributor could be selling the product to supermarket chains – so, in other words, the debtors could very well be outstanding. How they source the product will have an impact, and what they do with it after they source it will have an effect. This is why the factor or P.O. financer will never know until they look at the deal, so individual cases are touch and go.
What can be done under a purchase order program?
P.O. financers like to finance finished goods being dropped shipped to an end customer. They are better at providing financing with a single customer and supplier. For example, a produce distributor has many orders and sometimes problems financing the product. The P.O. Financer will want someone with a big order (at least $50,000.00 or more) from a major supermarket. The P.O. financer will want to hear something like this from the produce distributor: “I buy all the product I need from one grower all at once that I can have hauled over to the supermarket, and I never touch the product.
I will not take it into my warehouse or do anything to it, like wash or package it. The only thing I do is obtain the order from the supermarket, and I place the order with my grower, and my grower drop-ship it to the supermarket. This is the ideal scenario for a P.O. financer. There is one supplier and one buyer, and the distributor never touches the inventory. When the distributor handles the list, it is an automatic deal killer (for P.O. financing and not factoring). The P.O. financer will have paid the grower for the goods, so the financer knows that the grower got paid, and then the invoice is created.
When this happens, the P.O. financer might also do the factoring, or there might be another lender in place (either another factor or an asset-based lender). P.O. financing always comes with an exit strategy, and it is another lender or the company that did the P.O. financing that can then go in there and factor in the receivables. The exit strategy is simple: The invoice is created when the goods are delivered, and someone must pay back the purchase order facility. It is a little easier when the same company does the P.O. financing and the factoring because an inter-creditor agreement does not have to be made.
Sometimes, P.O. financing can’t be done, but factoring can be.
Let’s see if the distributor buys from different growers and car carries many products. The distributor will warehouse it and deliver it based on the needs of their clients. This would be ineligible for P.O. financing but not for factoring (P.O. Finance companies never want to finance goods that will be placed into their warehouse to build up inventory). The factor will consider that the distributor buys the goods from different growers. Factors know that if growers don’t get paid, it is like a mechanics lien for a contractor.
A lien can be put on the receivable until the end buyer, so anyone caught in the middle has no rights or claims. The idea is to ensure that the suppliers are being paid because PACA was created to protect the farmers/growers in the United States. Further, if the supplier is not the end grower, then the financer will not have any way to know if the end grower gets paid. Example:
A fresh fruit distributor is buying a big inventory. Some of the list is converted into fruit cups/cocktails. They package the fruit as fruit juice, and the family packs and sells the product to a supermarket. In other words, they have almost altered the outcome completely. Factoring can be considered for this type of scenario. The product has been changed but is still fresh fruit, and the distributor has provided a value-add.