Purchase Order Financing
Purchase Order Financing assists companies in paying their suppliers. Large orders, seasonal sales, new product launches, and business expansions can place real pressure on the cash flow of a business. Some suppliers may require payment on delivery while customers, especially the larger ones, want to pay in 30, 60, or even 90 days. Expenses for time, labor, packaging, shipping, etc. have to be met for all company orders, so an unusually large order that may be exciting to the sales department may be disastrous to the company’s cash flow.
When a business receives a large order that may hamper the cash flow for the entire business, should the order be turned down and allow the competition to capture it? Absolutely not! Purchase Order Financing (PO Funding) is a financial tool that allows a company to obtain the working capital needed and can typically provide more financing than a standard bank line of credit.
PO Funding can even be used if the company doesn’t have credit. The purchase order from a financially strong customer, or government entity, is the security for the funder. Purchase Order Finance is an ideal tool to assist a company grow past its current financial limitations and can even provide a young growing company the ability to pursue and close sizable sales contracts.
Compared to traditional bank financing, PO Funding is easy to
qualify for and can be quickly set up. The main requirement is that the purchase order be from a credit worthy commercial or government customer.
PO Financing allows up to 100% financing of the supplier costs permitting the delivery of more and larger orders. Due to the financing being directly tied to the purchase order, the company does not experience the same limitations associated with bank financing.
Benefits of Purchase Order
1. Allows the sales team to pursue ambitious opportunities.
2. Ensures timely delivery of product.
3. Expand sales without increasing bank debt, or selling equity.
4. Current cash flow can be used for marketing, payroll, etc., instead of material.
5. Maximizes sales opportunities, while minimizing capital constraints.
6. Improves the company’s competitive edge.
The company finds a funding source that can provide purchase order funding for their industry. Information regarding the purchase order, work schedule, and cash requirements is provided to the funder for due diligence and to set up an account.
The purchase order must be from a credit worthy company, or government agency. Orders from start-up companies, or businesses with a shaky financial position are not acceptable, because the funder will be repaid when the invoice is paid. If the funder has hesitations about the financial ability of the company issuing the purchase order, the funder will not be willing to take the risk.
When it is determined the funder will accept the purchase order transaction, the account is set up and funding can take place within a week or two. In the event the supplier is located overseas, payment can be facilitated by the use of Letters of Credit. Using Letters of Credit on international transactions can protect the business from many of the pitfalls of importing products from foreign suppliers.
The PO Financing company buys the products from the suppliers in the company’s name. It then ensures that the products are properly delivered. Once the order is delivered and approved, the funder will pay the suppliers directly. The money does not pass through, nor does it get handled, by the company. This is due to the fact that purchase order funding is not a business loan, which would be considered a debt on the balance sheet of the company.
When the order to the customer has been fulfilled and delivered, an invoice is issued. Once an invoice is paid, the transaction between the parties is settled. Since most invoices take 30 to 60 days to get paid, it is common to combine PO Financing with Accounts Receivable Factoring because this will reduce the total cost of the transaction.
Although purchase order financing is a great tool, it is not
for everyone. Due to the risk involved, most PO Funding Companies will only finance transactions for companies that:
1. Sell products to reputable customers or government entities.
2. Have profit margins of at least 20-25%.
3. Have sales that are considered final. (No guaranteed sales or consignments)
4. Have been in business for at least one year.
For companies that meet the requirements, sales capabilities will no longer be limited by the company’s financial strength. The sales department can sell as much as the company can finance, and if the company’s clients are credit worthy and good payers, there is no constraint as to how much can be financed.
1. With the current world wide financial crisis, PO Funding provides a viable alternative of funding that both business owners and financial consultants should consider.
2. Accounts Receivable Factoring (A/R Finance, Cash Flow Financing) is a type of financing that provides financing based on receivables (or invoices) for delivered products. With PO Funding once an invoice is generated, the invoice is usually factored and the funds are used to close the PO Financing. This is done because the rates for PO Funding tend to be higher than the rates for factoring receivables. This little trick can help you save money and realize greater profits.
3. Neither the company receiving PO Financing, nor any consultant involved, can use other sources for the A/R Financing.
4. Typical transactions range from $100,000 to $25 million.
5. Companies who uses Purchase Order Financing: importers, exporters, wholesalers, distributors, and manufacturers. Companies who are experiencing rapid sales growth, capital constraints, sales volatility, seasonal sales spikes, high development costs, stretched credit, and new product launches.