DEAL SPOTLIGHT THE ANATOMY OF A DEAL
Innovative Inventory Financing is the Perfect Solution for High-Growth Food Manufacturer BY JENNIFER PALMER With the retail landscape evolving, lenders must adapt. Many now position themselves as direct-to-consumer (DTC) lenders, underwriting e-commerce companies’ businesses based on turnover and cash flow. Still, inventory is a necessary asset that should also generate availability. Having cut my teeth in inventory lending when I started at Gerber Finance, an inventory-only lender, my experience has become a valuable tool, given the changing landscape. With the retail landscape evolving, lenders must adapt. Many now position themselves as direct-to-consumer (DTC) lenders, underwriting e-commerce companies’ businesses based on turnover and cash flow. Still, inventory is a necessary asset that should also generate availability. Having cut my teeth in inventory lending when I started at Gerber Finance, an inventory-only lender, my experience has become a valuable tool, given the changing landscape. This expertise served us well last year when a small, but highgrowth, food manufacturer approached JPalmer Collective for financing. This company has a strong DTC presence, and most of the sales are online, meaning the accounts receivable on the balance sheet are far less than the inventory. In this situation, a typical assetbased lending structure with an accounts receivable balancer on the inventory would not work for the company, so we had to get creative. The need for an innovative solution was urgent and underscored the evolving nature of the lending landscape. The first thing we did -- and always do -- is determine what the company needed for the next several months and then see if we could get back into a structure that benefits both of us. Since the client had an existing lender who needed to be repaid, we had to generate enough availability on the closing borrowing base certificate (BBC) to take out the lender. We also needed enough surplus working capital to ensure that money added value to the company’s growth story.
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THE SECURED LENDER JULY/AUG 2024
When creating the BBC, we separated their accounts. We ascribed different advance rates, reflecting their various dilution rates rather than just blending the accounts receivable, calculating the average dilution, and using one advance rate. This approach unlocked additional availability immediately. Next was the inventory advance. In this case, we didn’t order an appraisal as we are intimately familiar with the inventory class. Hence, we just worked off the inventory cost. The company is entirely seasonal, and while we are mindful of that, we still wanted some cap on inventory to ensure the company managed
liquidity wisely. Accordingly, we looked at their average cost of goods sold, analyzed their four-month lead time, and capped their inventory holding at four months of Cost of Goods Sold. Again, the company is seasonal, so we underwrote their budgeted needs and built-in recurrent spikes for this cap, which made sense for the cyclical peaks in their business. This action ensured there were restrictions on the amount of inventory they could purchase and keep on hand, but it also made sense for their business.
JENNIFER PALMER JPalmer Collective
Lending on inventory in transit is something I have always been comfortable doing. Still, we often add this to the availability mix after the first three months of the deal, and this case was no different. This 90-day period of an agreement is also a transition for the client; during that time, it’s essential to ensure that the company complies with the cash management systems and reporting. Saving this additional availability is a deal sweetener that helps motivate the client to ensure that all policies and procedures are followed and that the closing checklist has been tackled. Lending on inventory is not for everyone, so monitoring this inventory by Stock Keeping Units (SKUs) against budget is critical. Tweaking the cap and/or advance rates to reflect the reality of the business and changes in the industry are decisions that must be made in real time. This transaction resulted in a well-funded client able to handle the fluctuations of their business and a clean balance sheet. Jennifer Palmer is the CEO and founder of JPalmer Collective. She is the former CEO of Gerber Finance and a past president of the Secured Finance Network.