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Invoice Factoring Case #2 Party Time Bakery LLC
The Chicago Area Company's Situation
Party Time Bakery LLC is a wholesale bakery specializing in baking and distributing cookies. It distributes its cookies to local restaurants, grocery stores and some large food wholesalers. Party Time was a start-up when it first sought invoice factoring (a factoring credit line) from us. Though a start-up, the company had plans to get out the chutes fast. This is because its partners were seasoned veterans in the industry with strong reputations and many connections. In fact management believed the company could achieve $2 million in sales within 12 months after the company opened its doors.
The Chicago Area Company's Problem
The problem was that Party Time Bakery was undercapitalized and thus did not have the financial statement strength or track record to obtain the selling terms it required from its suppliers. The best terms it could negotiate from its suppliers were Net 10 Days. There was a timing problem here in that Party Time Bakery's customers required anywhere from Net 30 to Net 60 Day terms. Money from its customers would not be coming in for 30-60 days, but its suppliers needed to be paid within 10 days. This was the problem.
Party Time needed capital to keep its suppliers paid per the 10 day terms. Without this capital the suppliers would not be paid on time. If the suppliers were not paid on time they would not ship product. Without shipped product Party Time would not be able to fulfill all the purchase orders it would receive from its customers. Its customer base was hungry to buy from Party Time.
Would Party Time Bakery find a way to realize all these sales? It would, and invoice factoring would be the solution.
The Factoring Solution
Party Time Bakery had initially sought financing from local banks. Because Party Time was a start-up and was undercapitalized, the banks were unable to help. One of the bankers Party Time talked to though believed in Party Time's management and thought his bank might be able to provide a credit facility 18 – 24 months down the road. In the meantime this banker believed a factoring credit line (invoice factoring) was the perfect fit for Party Time. This banker also believed in our integrity and our ability to provide a quality invoice factoring product at a very fair price. Thus the banker referred Party Time Bakery to us, while setting up deposit accounts for Party Time at the bank.
The financing Party Time required was a perfect fit for our invoice factoring program. Most of the company's suppliers required Party Time to pay them within 10 days of receiving shipment of product. Party Time Bakery was able, in just 5 days time, to turn product it received from its suppliers into finished baked cookies, ship the cookies and create an invoice to its customers.
The invoice factoring we provided allowed Party Time to receive an 85% advance on each invoice it created. This advance would hit Party Time's bank account within 24 hours after we received a copy of the invoice to Party Time's customer. With this 85% advance on each Party Time Bakery invoice, Party Time was able to pay its suppliers in full within 6 days time – well within the 10 day terms its suppliers required.
Thus Party Time could receive purchase orders, order product from its suppliers and ship to its customers at will. Because of the invoice factoring program we provided, there was no financial obstacle to Party Time Bakery realizing a sale on every purchase order it received from its budding customer base.
The Story's Happy Ending
The invoice factoring we provided Party Time Bakery LLC allowed Party Time to get out of the chutes rapidly and in its first year of operation, realize the $2 million in sales it had forecasted was possible with the necessary financing partner. Because we were able to provide a quality invoice factoring product, we were that partner.
Within 2 years time Party Time was doing $3 million/year in sales and was making a very healthy profit. It had retained most of its earnings and therefore its balance sheet was strong.
Party Time was now eligible for a bank credit facility and that's what it got. The original banker who had referred Party Time to us and who had been providing Party Time with deposit account and cash management services, now would take on the lending relationship too.
The bank would paid us off and provide a robust and inexpensive bank credit facility that would finance Party Time LLC's growth into the future.
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