The market is full of companies that advertise purchase order (PO) financing programs. However, only a few companies have the experience, knowledge, and capital to handle these transactions successfully. Choosing the right finance company is important because it plays a critical role in the outcome of your transaction.
On the surface, most PO transactions appear simple. In reality, most are not. Transactions often have a number of contractual contingencies tied to them: manufacturing schedules, quality requirements, PO conditions, etc. All of these components play important roles. You must work with a partner who understands how all the parts work together and who can implement the right financial structure.
If you need to learn more about PO financing, please read “What is purchase order financing?“. This article will give you a solid understanding of how the solution works, and then you will be ready to ask a purchase order financing company the following questions:
Question #1: Do they focus on PO financing or do they offer it “on the side”?
Many factoring companies advertise that they provide purchase order financing “as well.” In most cases, these companies dedicate the majority of their resources to factoring while handling only a few PO financing transactions per year. Actually, they offer PO financing to accommodate a few clients and to win larger factoring deals.
This approach can work in cases where the transaction is small, simple, or not strategic. However, most PO financing transactions are complex and require industry expertise. Without this expertise, there is a high risk that the transaction could unravel, compromising the entire portfolio. If your transaction is large, complex, or strategic, you are usually better off working with a company that has a full-fledged trade finance department.
Question #2: Have they handled a transaction in your industry?
Choose a finance company with experience in your industry – or similar industries. Also, if you work with large corporate clients (e.g,. Walmart, Costco, etc.) , partner with a company that has handled purchase orders from that client before. Most large companies have complex master purchase agreements, and you are better off working with someone who is familiar with them.
Question #3: Do they only use letters of credit to pay suppliers?
Paying suppliers with letters of credit is one of the safest transaction methods. As a result, many finance companies only handle transactions that involve suppliers who accept letters of credit as a form of payment. Unfortunately, many suppliers are not comfortable working with letters of credit, as they can be complex – which makes getting paid cumbersome.
If possible, select a company that is also comfortable using cash against documents or paying by wire transfer after inspection/shipment. Note that payments to foreign suppliers are usually made with a letter of credit.
Question #4: How do they handle deposit payments?
Most foreign manufacturers/suppliers require a deposit payment before starting to work for a specific order. Prepayments can create complications since they can increase the risk of the transaction. As such, some finance companies refuse to make prepayments.
However, there are methods to effectively handle these payments. Ask your finance company how they handle prepayments to ensure you are comfortable with their payment methods.
Question #4: How do they handle guaranteed payment clauses?
Many contracts from large corporate buyers have a guaranteed payment clause that allows the client to return any unsold inventory and demand a full refund. A number of companies that sell products on TV have these clauses. Unfortunately, guaranteed payment clauses can derail most transactions.
However, there are ways to negotiate better terms with your clients to reduce the risk of these clauses. If these clauses affect your order, choose a company that has experience with them.
Question #5: How long have they been in business?
This question may seem obvious, but it’s actually quite important: ask your prospective finance company how long they have been in business. Select a company that has been in business for at least two years, though longer is preferable. Purchase order funding is a growing field and there are new companies entering the industry every month. Consequently, many finance companies have limited experience and have not been market-tested. Working with these companies can be risky, especially if the owners are not seasoned industry veterans.
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We are a leading PO financing company and can provide you with competitive terms. For more information, get a quote or call (877) 300 3258.
Note: If you are also looking for a factoring company, please review “How to select a factoring company“.