One of the most common reasons that companies look for purchase order financing is that they have a large purchase order and they need funds to pay their supplier. Suppliers usually ask for a down payment before fulfilling an order. Consequently, clients ask their purchase order finance companies to cover these down payments so the transaction can proceed.
This article discusses how purchase order finance companies pay supplier expenses.
Why is your supplier asking for a prepayment?
A supplier may ask you to prepay for goods, or at least put a down payment, for either of the following two reasons:
Reason #1: Your supplier is uncomfortable offering credit to you
This problem is common if the supplier doesn’t know your company well. While they can easily fulfill the order, they are not comfortable with your company’s credit profile – either because your company is new or your order is especially large. They ask for a prepayment because they want assurance that they will get paid when they complete the order.
Purchase order financing is often a great solution in this scenario. Your company can leverage the PO finance company’s credit strength and use an appropriate payment method to address the supplier’s concerns.
Reason #2: Your supplier needs the prepayment to pay their suppliers
This situation is common if your supplier is small, has financial problems, needs financing, or is trying to fulfill an order that is too big for them. They ask you to prepay for goods because they need to pay their own suppliers and employees so they can fulfill your order. Basically, they are asking you to finance them.
PO funding won’t work in this scenario. Think about it this way: would you feel comfortable giving your supplier money if you had no assurance they will deliver? Remember, our business is to finance our clients, not to finance their suppliers.
Supplier payment methods
We can pay suppliers in several ways. The following methods usually work well if your supplier can fulfill your order but is concerned about getting paid:
Method #1: Wire transfer at time of shipment
If your supplier is large enough and has a good credit profile, we can pay them via wire transfer at the time of shipment. This method usually works well for transactions in which the supplier is based in the US or Canada. It usually won’t work if your supplier is overseas, as they are unlikely to ship and provide documents (needed to clear customs) without getting paid first.
Method #2: Cash against documents
This method works well for transactions in which suppliers are based locally or abroad. It offers protections similar to that of a letter of credit, without having the detailed requirements needed to release payment. The transaction is usually intermediated through a bank that manages documents and releases payments.
Method #3: Letter of credit
This method is the safest way to pay a supplier. The finance company opens a letter of credit to the benefit of your supplier through an internationally recognized bank. This instrument guarantees your supplier their payment as long as they deliver your order in the correct quantity, specifications, and time frame.
Your supplier has the option to confirm the letter through their own bank, which can provide further guarantees of payment.
We cannot prepay suppliers or provide down payments
Unfortunately, for the reasons mentioned in this article, we are unable to provide prepayments or down payments to suppliers through wire transfers. However, we are able to pay suppliers through any of the methods mentioned in the previous section.
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