Guaranteed Sales? That will kill your changes of financing

A number of retailers are known for buying goods from their suppliers using a sales term commonly known as a "guaranteed sale". Don't let the name fool you, guaranteed sales can be very risky for you. They can be challenging for your business and eliminate any chances of having the transacting funded with purchase order financing.

What is a guaranteed sale? According to the business dictionary it's an

"Arrangement under which a manufacturer or supplier takes back the goods that remain unsold after a specified period. See also consignment sale."

Let me state it a little bit differently. In a guaranteed sale scenario, your client can return any goods for whatever reason, whether real or imagined. Furthermore, they can demand you return any payments they have made for those goods - or - they can deduct the cost of the return from future payments.

So, a guaranteed sale is NOT a sale until and if your client SELLS the product. Let's hope his sales staff is good because you are depending on them...

Now from the home stretch, why does this kill any chances of getting factoring or purchase order financing? In both instances, the collateral is the payment from your client. And in a guaranteed sale scenario the payment amount will always be in question.

Let me give you an extreme example.

Let's say that your client purchases 1,000 widgets from you at $1 per widget. Let's also say that the purchase order finance company paid $700 to your widget supplier for that 1000 widget sale.

Now, two weeks after the purchase, your client's purchasing manager realizes that she purchased way too many widgets. They were only able to sell 500 of them. She then, pays the $500 invoice for sold and returns the 500 unsold widgets.

But wait, you financed $700 for the transaction but only have a $500 payment. The transaction is now underwater. You are now the proud owner of a busted transaction.

I am not saying that you should not do guaranteed sale transactions - only you can decide that. But I do want to make sure you understand their ramifications.

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Looking for information on purchase order financing? Read the purchase order finance blog