How To Locate And Secure
Purchase Order Financing
For Your Business
While purchase order financing can be very applicable to a broad range of businesses, this type of business financing facility still remains a mystery to many business owners and managers.
The basic premise for purchase order financing is as follows.
A business has in its possession a purchase order to supply finished goods to a customer. In order to complete the transaction, the business requires additional capital to pay its supplier for the goods required to fulfill the order.
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For the transaction to be eligible for purchase order financing, the customer that issued the purchase order or P.O. needs to be credit worthy and the supplier has to be a well established source for the product.
The goods being sold need to carry a minimum margin of 20% for a number of reasons. First, the purchase order financier is not likely to finance 100% of the value of the purchase order and will more likely finance between 50% and 80% of the actual purchase order amount. Second, the purchase order financier will need to get paid and a higher margin is more likely to support the higher costs of financing associated with purchase order financing. Third, in the event of payment breach somewhere in the transaction whereby the financier will attempt to seize and liquidate security, a higher margin product can provide a liquidation discount that a lower margin product could not without incurring a loss.
The financier will pay the supplier directly (in most cases) and will also collect payment from the customer once the purchase order is fulfilled. Once everything is closed off, the purchase order financier withdraws their financing fee from the available net proceeds and returns the balance to the business owner.
This in a nutshell is the basic purchase order financing scenario.
However, there are many variations around this base case description that can have a large impact on your ability to locate relevant lenders as well as securing financing from the ones you talk to.
First, most purchase order financing is for commodity based, hard goods. The reason for this requirement is due to 1) fairly standardized product that can be readily supplied without complication, and 2) an available liquidation pathway for the lender exists in the event of default. Basically it’s a much more straightforward process to liquidate a commodity with a decent margin than a more specialized product with a high margin.
The commodity based good can be already produced or still need to be produced by a manufacturer. Here’s where the variations start. Some lenders will only provide purchase order financing for commodity goods that are already produced. Other lenders will focus more on goods that need to be manufactured. Still other lenders will consider raw material purchases that require a value added process by the borrower.
Second, purchase order financing can be applied to asset transactions for things like real estate or customer lists, or equipment, where an order to purchase is still issued and a supply source has been established. This type of transaction could be classified as a bridge loan, but it can also fall under the realm of p.o. financing.
Third, geography can have a big impact on various lenders in a number of ways. Some p.o. financiers will only deal within one country for all sides of the transaction, meaning the borrower, customer, and supplier all need to reside and operate in the same country. Some financiers will require the borrower and customer to be from the same country and they will only consider certain countries, but will allow the supplier to be from another country, but again will only allow this consideration for certain countries and even certain industries.
Fourth, payment terms will also dictate which lenders can assist with financing. Some lenders will only provide letters of credit to suppliers that can be drawn on once goods are delivered. Unfortunately, there are many manufacturers that require partial or full payment in advance of production and do not accept letters of credit before starting their manufacturing process. In these cases, it becomes relevant to only consider p.o. financiers that can provide advanced payments to suppliers.
Fifth, there will be differences among p.o. lenders with respect to financing minimums, financing maximums, percentage of p.o. that can be financed, one off financing versus ongoing financing facility. With regard to the last two points, some companies will consider a single P.O. transaction for financing where other companies will only consider applications for financing where there is an ongoing need for purchase orders being financed.
Sixth, many purchase order financing sources are primarily Factoring companies that allow their existing customers to use p.o. financing to grow their business further. These companies don’t typically do stand alone purchase order financing or one off purchase order financing with a new customer.
Seventh, lenders will also have different requirements in terms of how long you’ve been in business, your transactions history with the supplier and the customer, and so on. For instance, if you’re new in business and are trying to secure purchase order financing for the first time, the process of locating a suitable lender will be more difficult. Also, if the transaction involves a new supplier, especially one from overseas, many lenders will not be interested in the opportunity to provide financing.
I could go on, but I think I’ve made the point that there is a great deal of potential variability among lenders that provide p.o. financing products.
So How Do You Go About Securing Financing For Your Purchase Orders?
The key here is to understand all sides and requirements of the overall transaction from customer and supplier and then utilize that information to help identify relevant lenders.
If you can’t easily determine from public material or referral reference the specifics of a lenders “box” so to speak, then make sure you have all the pertinent information at your finger tips when you make an inquiry so that the lender can qualify you as fast as possible. Getting a quick No doesn’t mean that you can’t secure financing; it just means that it won’t be from that source. Too often business owners and managers do not cut to the chase fast enough with these types of lender who can have very unique requirements and end up wasting valuable time and even money in the process.
Move on to the next lender that you feel is most relevant to your needs and get into the qualifying details quickly. Not only will you find out right away if this is a source of financing that may be able to help you, but you’ll also score high marks for a good first impression by demonstrating that you understand and are on top of the details of the deal.
Remember this is all about relevance and finding a lending source that fits your business requirement. Unfortunately, websites and marketing materials don’t tend to provide you with enough information to make a clear assessment of each lender before you contact them, so make sure you are prepared with the relevant facts before contacting anyone.
One of the best ways to improve your probability of success is to enlist the services of a business financing specialist like myself to help you navigate through this process.
If you would like to talk about how I can assist you with purchase order financing, please Go Here to get in touch with me.
For more information on financing your business, Go Here.
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