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Many of the consultants who bring me prospective deals are totally unaware of a phenomenally effective tool that can easily increase their commission revenue by 50 percent or more, and that’s with the same client! Considered to be a variation of purchase order financing, but not quite, the tool I’m referring to is called a vendor guarantee.

To properly explain the vendor guarantee, we first have to define the concept of PO financing a little more clearly. PO financing allows a company that either manufactures or wholesales a product and does not have the needed credit lines or history, to acquire the necessary materials or finished goods in advance from suppliers that require payment in full prior to delivery.

The PO funder typically advances up to 60 percent of the face value of a purchase order from a reliable and creditworthy debtor, subject to a fairly restrictive set of rules and guidelines that usually make most potential deals difficult to close. Because of the risk associated with PO deals (such as non-performance, late delivery, etc.), the fees can be prohibitive, especially if the clients gross profit margin would not allow for the added cost.

Not including the factoring fees, PO funding can easily add between 5 percent to 8 percent more to the manufacturer’s/wholesaler cost of goods sold. At a time when most companies need to keep these costs low to compete in the marketplace, PO financing is not going to be the best solution. So, here’s where the vendor guarantee concept comes into play.

The vendor guarantee is a simple agreement that, if accepted by the supplier (vendor), can be implemented by the factoring company to “guarantee” payment directly to the supplier if he will release shipment of the materials/finished goods to the client once the invoice is generated and verified by the customer (the client’s debtor). The factor pays the supplier immediately for the cost of goods, then forwards the remaining balance of the advance to the client. The factor will not pay the vendor until the invoice is accepted and verified and does not take responsibility for nondelivery.

For a fee that is considerably less than PO financing, a new factoring client can be added to the revenue stream, increasing commissions that would otherwise not be earned.

It should be noted that the suppliers are taking some risk if the orders are not met in a timely manner, but they will usually only consider the arrangement if the customer relationship is good and they have confidence the funding source will pay on time. The vendor guarantee will not be suitable for all your deals, but enough of them can be doable under this arrangement to make it worthwhile.
Written by Jeff Sheikowitz the vice president of business development for Paragon Financial Group.

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