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Scrap Metal Dealers and Purchase Order Financing

By: Gunaseelan The scrap metal business is tough for dealers and agents. When they order scrap for clients they have to wait around one month before it arrives and only then can they charge the client. However, they have to complete payment for the stock before the order is sent out, which means that they are only limited to selling as much value as they currently have as their cash balance on their ledger account. This problem acts as a limitation to most businesses that operate in this space, because the can only ever grow their business at the rate at which their profit grows. And even then, that means no profit can be removed from the business; it must be kept and reinvested. For these reasons alone, the scrap metal business can be difficult because you need to have a lot of money to get started, and you will have liquidity problems to tend too as well as other issues such as sales, marketing and order fulfillment.

Despite that, there is a solution that most scrap dealers are failing to leverage to their advantage. Often they will want finance and go to the bank in search of a loan, however when they do they will be disappointed. Your average bank manager will not be savvy as to the operation of a scrap business and will not have anywhere near the knowledge necessary to ascertain the value that you can create. A bank manager will generally want evidence of successful trading for 3 years, and will also want to see that you have a suitable amount of assets or collateral that they can recoup in the case that the business is not able to keep up payments. For those reasons, this form of financing is generally unsuccessful, however that does not mean someone should give up.

Their next step may be to look for venture capital: however a scrap metal dealership is only likely to gain private equity finance in the form of angel funding from friends and family. The reason for this is that VCs look to invest in companies that have an exciting idea, a unique angle or some form of disruptive technology which is defensible from competition. You may get private equity if you have some trading history under your belt; however you are generally best to consider a bank loan at that point.

One thing that most businesses fail to consider is looking for purchase order financing. This will allow you to scale your business fast, not sacrifice equity and not have to worry about failing to deliver the volume of sales necessary to make interest repayments. This works by initially having your customer place a purchase order, you then go to your bank with this purchase order and ask that they pay the supplier or give the supplier a letter of credit. Then you get paid from your customer and pay the bank. This means that you only have to worry about closing purchase orders, and you can continue to grow your business.

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