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Article: Purchase Order Financing Basics

Let’s say that your company gets an unexpected surprise: your best customer calls and places a substantial order. However, the order is so large that you don’t have enough money to pay suppliers in order to fulfill it. What do you do with this scenario?

If you have an established relationship with a bank, you may be able to tap into a loan or, perhaps, a line of credit. But what happens if, like most small business owners, you don’t have a significant banking relationship? Do you tell the customer that you can’t help them – and hope that a competitor doesn’t grab the account? Fortunately, you don’t have to. We have a solution that can help you secure the sale and deliver the order.

What can purchase order financing do for you?

Purchase order financing helps you finance your large orders from solid customers by providing the funding necessary to fill orders that otherwise you could not afford to fill. It’s a tool that can empower you to grow your company quickly and take it to the next level.

Unlike bank financing, purchase order financing does not rely on your company’s financial strength. Rather, it relies on the strength of your customers and the reliability of your suppliers. This feature is critical for growing companies. Consequently, if you sell products to large companies or to government entities, we can help you with supplier payments.

Who is a good candidate?

To qualify for purchase order financing, you must only sell products/goods rather than services. An ideal candidate is a product reseller or distributor who is buying products from a supplier and shipping the products to the client. Unfortunately, we cannot finance direct manufacturers; the manufacturing part must be handled by your supplier.

One important detail is that this solution works only with transactions having profit margins 25% or higher.

Transaction details

The transactions are relatively simple to implement. The first step involves setting up your account for funding. Because of the due diligence involved, the process usually takes a week or two. However, subsequent transactions can fund in a couple of days.

During the setup process, we review your purchase order and run a performance profile on your supplier to ensure that they have a good track record. Once everything is in place, we proceed as follows:

  1. We pay your supplier by bank wire, cash against documents, or letter of credit.
  2. Your supplier manufactures the goods and ships them.
  3. Your client receives the goods and inspects them.
  4. After 30 to 60 days, your client pays for the goods.
  5. The transaction settles.

Supplier payment

The supplier payment method is determined by the track record of your supplier and their location. All foreign suppliers are paid using a letter of credit or cash against shipping documents. Local suppliers can be paid by wire transfer if they have a good credit profile. Otherwise, they are paid by letter of credit.

Inspections

We often require an inspection to ensure that your suppliers comply with the requirements of your client’s purchase order in terms of quantity of goods, quality, and other parameters. Inspections vary based on the type of transaction and risk and are determined on a case-by-case basis.

Transaction settlement

Purchase order finance transactions, by design, are self-liquidating: the transaction pays for itself with your client’s payment. As a result, there are two ways to settle a transaction.

The first way to settle the transaction is to combine this line with a factoring facility – factoring the invoice once the product is delivered. Part of the factoring proceeds is used to close the PO funding line, and the rest go to your company. Combining receivables financing with this type of funding usually results in lower costs. The second way to settle a transaction is to simply leave it open until your customer pays.

Would you like more information?

For a quote, fill out the instant online quote form. For more information, call us toll-free at (877) 300 3258 to speak with an expert.

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