By Bill Lassiter - Lynnray Financial

Every store owner looks forward to the day when the income from existing contracts is adequate to buy enough inventory to sustain desired growth. In most cases however, over the long history of a business, cash flow can fund only a part of inventory needs.

From the September How 2 issue of RTO Magazine

Every store owner looks forward to the day when the income from existing contracts is adequate to buy enough inventory to sustain desired growth. There is no cost of funds and no debt service to manage. In most cases however, over the long history of a business, cash flow can fund only a part of inventory needs.

The largest problem in the Rent to Own business is keeping funds available for inventory purchases. Each contract that goes out the door takes in only a fraction of the merchandise cost thus creating a negative cash flow.

Currently there are four major avenues to fund inventory purchases.

Cash Flow – Obviously it would be ideal to fund all inventory purchases from cash flow. Every store owner looks forward to the day when the income from existing contracts is adequate to buy enough inventory to sustain desired growth. There is no cost of funds and no debt service to manage. In most cases however, over the long history of a business, cash flow can fund only a part of inventory needs.

Vendor Terms – Any extension of vendor terms helps take the pressure off cash flow. If you can negotiate 30 to 180 day terms, even if there is a substantial carrying charge, it will be to your benefit. Unfortunately, the contract will still cash flow negatively.

Revolving Floor Plans – Various finance companies offer a revolving floor plans that allow the RTO dealer to order merchandise from their Vendor and have it put on a schedule that pays back usually 1/3,1/3, 1/3 over ninety days. Again, any program that stretches re-payment is useful for easing the negative cash flow squeeze. Unfortunately, it does not eliminate it.

Long Term Financing – The only credit facility that truly eliminates negative cash flow is long term financing. Depending on the length of the RTO contract, 18 – 27 months would be the ideal repayment term. Payment to the lender would always be substantially less than Income on the contract, thus resulting in constant positive cash flow. Banks can obviously furnish this type of financing, but only a small portion of RTO operators are able to convince their bankers to extend this type of credit. Banks want hard collateral ( Real estate, CDs, etc) and do not generally understand the RTO business and are reluctant to take contracts as collateral. Most RTO businesses get started with SBA loans and these afford long term financing. However, careful planning must assure that a 7 or 10 year loan does not become an overhead nightmare when the cash benefit of the original contracts has expired leaving an on going payment with no corresponding income.

Every rent-to-own business is different and conditions change constantly. We recommend a mix of all the methods discussed above. Cash flow is more art than science. Each business owner must develop their own dynamic model that moves the various options in and out as needed.

For further discussion call Bill Lassiter at Lynnray Financial Corp. 800 535 4138. Lynnray Financial has designed specific RTO programs in the long term financing arena that insure positive cash flow, conservative repayment, and unique tax advantages. One such program defers payment for 90 days to allow a cash strapped business the opportunity to not only stock their floor with popular items, but to take advantage of truckload and economy of scale buys.