Purchase Order Financing - Fuel For Business Growth

PURCHASE ORDER FINANCING – AN OVERVIEW

Summary: Purchase Order Financing ("PO Financing") is frequently used when more complex financial instruments, like letters or credit, are unavailable, or prove too complex. It is a method of trade financing where your company has a supplier willing to sell you a product for, say $50,000.00, and you have a buyer who has given you a firm committed purchase order to buy that same product for $100,000.00. The issues are that 1) the supplier won’t give you credit, and 2) the buyer does not wish to pay in advance for a product which has not yet been delivered. PO Financing is a means of getting sufficient capital or guarantees (in lieu of capital) to pay the supplier the $50,000 so that you may complete the trade and make a profit.

All businesses should understand the basics of purchase order financing, its potential benefits and pitfalls, and who might use it. Simply put, it’s a way to purchase finished goods or raw materials that will be turned into products that are resold and shipped, usually within a relatively short time frame. It is based on having a verifiable purchase order. Typically, the financing is issued, completed and repaid in less than two months.

What kinds of companies use PO financing?

PO financing is appropriate for many businesses: from smaller start-ups with sales orders coming in but without necessary capital to fulfill; to larger, more established businesses with unusually large orders or for a big new customer. Wholesalers, drop shippers and resellers frequently avail themselves of this option. PO financing provides the capital needed so supplies can be bought, product produced, and finished goods shipped.

It’s a great way to put your company on the map, or launch to the next level. More to the point, you can avoid turning down a deal for lack of access to funding.

What is the biggest potential negative to purchase order financing?

The single biggest stumbling point is also the reason purchase order funding is possible in the first place: approval is based on the credit, track record and trustworthiness of your customer. The financiers are in essence gambling on you, your suppliers, and your buyer holding up their end of the bargain - if anything falls through, they take the hit. So be sure that your trust in your customer is well placed.

Finally, partnering with a purchase order finance company needs to make good business sense for your organization. Consider: 

             Fees and interest rates; the purchase order finance company takes a cut of your profits - not much, but you need to decide that it’s equitable;

•   Underwriting requirements, including minimum loan amount (it may be more than you actually need);
  
  
•   Delivery time, billing schedule and other timeline demands (international transit times can be particularly troublesome here). 
  
  
   A BRIEF NOTE ABOUT CREDIT INSURANCE
  
  
  If your customer's credit is weak or questionable, it may be wise to purchase a credit insurance policy from a specialized broker. This insurance provides payment in the event that your customer or client fails to pay when the subject invoice comes due. These specialized policies can substantially increase the likelihood of your company being able to obtain purchase order financing (and often at better rates and terms).
  
  
  Thank you, as always, for reading me. - Douglas
   
  

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