Learn All About Purchase Order Funding Cash FlowPurchase Order FundingPurchase order funding is one of the simplest forms of commercial cash flow and is the small and medium-sized business owners’ best financial friend. If you are a new business and you get a request for a huge order, it brings great excitment and huge dread. You start mentally adding up all the money you will make, all the bills you can pay, the supplies you can buy, and all the business you can get after that. Then, your bubble bursts when you talk to the manufacturer of the product. You find that he demands partial payments: first, when you place the order, then an additional payment before he ships the order, and, finally, the rest upon delivery. Your euphoria subsides. You realize you may have to refuse the order. Since you are a new, small business, you simply do not have the credit history that will allow you to request payment terms, nor do you have a bank line of credit. Even if you were an established business and got that huge order, you still might have to refuse it, if you do not have a good credit history or have a large enough line of credit with your bank. There is a solution, and it is called Purchase Order Funding. If your customer is established and has good credit, you can get a Letter of Credit or an advance of funds on the purchase order. You can use this advance to pay for the raw materials, parts, finished goods, packaging, shipping, inspections, etc.
What is Purchase Order Funding?Purchase order funding is short term financing which can provide up to 100% of costs to fill orders from credit-worthy customers that allows them to accept purchase orders, regardless of their current capital availability. Purchase order funding is often used for the purchase or manufacture of specific goods that have been pre-sold to credit-worthy end customers, as well as the import and export of goods. With it, manufacturers, distributors, etc., receive funds to pay for raw materials to be assembled, then sold or to pay for completed products to be sold to end users. Purchase order funding (or purchase order financing or purchase order advance, as it is also known) is a popular financing option for many manufacturers, importers, exporters and distributors. They used it to provide quick cash flow reserves. This short-term funding type is used to finance the purchase or manufacture of specific goods that have been pre-sold by the client to credit-worthy clients. This type funding involves the issuance of letters of credit or providing funds that allow companies to secure the inventory they need to fill customer orders. In essence, purchase order financing is much like having a silent equity partner - without giving up ownership of the business. It is ideal for companies that re-sell finished products at a profit. One of the remarkable features of purchase order funding is that in most cases, the client business has few out of pocket expenses. As good as it can be, purchase order funding or "PO funding" can also be one of the more difficult types of commercial finance to secure for fast growing businesses. Factors, however, routinely provide some amount of purchase order ffunding as "pre-ship" invoice financing. Purchase order funding is similar to factoring. Many times, purchase order funding is combined with invoice factoring (also known as receivable factoring). The single biggest stumbling point in getting purchase order financing is also the reason purchase order funding is possible in the first place: approval is based on the credit, track record and trustworthiness of a business' customers. Therefore, qualifying for purchase order funding is harder than qualifying for invoice factoring which is relatively easy to procure. With a purchase order financing arrangement, the manufacturer will use the actual purchase order itself as collateral for the working capital he receives from the financing organization. This working capital financing is protected by a security interest in the purchase order. In other words, the purchase order becomes collateral for the funds. This is unique in that the lender normally perfects his security interest by taking possession of the inventory or raw materials. Should the manufacturer not repay, the funding firm will take possession of the resulting inventory or raw materials.
Some agencies specialize for a certain category of invoice factoring. For example, some agencies indulge only in invoice factoring for medical industry. Some agencies, which cater to small and medium businesses for invoice factoring, create invoices online and receive immediate funding. They usually give a 24 hours turnaround. Other types of agencies also give funds to small businesses for their day to day operations against collateral of their invoice or purchase order. These kinds of agencies also buy mortgage notes, structured settlement annuity or medical receivables.
What Are Purchase Order Qualifications?While requirements and qualifications for purchase order finance will vary from firm to firm, some are relatively standard. To qualify for purchase order financing your business generally must: • Have an established factoring relationship. • Not be re-packaging or simply creating an inventory with the product. • Have an established and acceptable credit history.
• Funding orders must be of significant size ($100,000 and larger).
(NOTE: Purchase orders for services to be performed, rather than goods to be delivered, are virtually never acceptable for typical purchase order funding. This type of finance is considered "contract finance" and is generally obtained through local commercial lenders such as banks or unique providers of such services.)
Who Can Benefit From Purchase Order Financing?Purchase order funding is an excellent capital option for small-to-medium-sized businesses. When a business needs a quick response to a sales opportunity or a quick infusion of working capital, purchase order funding can be an excellent option. It is a simple-to-use funding tool that allows companies to finance big orders they otherwise would not be able to fulfill. This makes it an ideal tool for small-to-mid-sized distributors, wholesalers and re-sellers who are making big sales and getting ready to take their company to the next stage of growth. It is also an extremely powerful tool for exporters, and importers purchasing or selling goods from Europe, the Pacific Rim, and elsewhere.
Purchase order financing is available in virtually any industry and all industry segments (...with the explicit exception of construction). Obtaining purchase order funding is faster and easier than obtaining traditional bank financing. In that respect, purchase order funding is more risky to the funding source. Because it is a risky form of financing, it, therefore, costs more than traditional financing. Your company might benefits from purchase order funding if: - You need a funds quickly to fulfill an immediate sales order - You simply need additional working capital - You don't want to incur additional credit risk, be it foreign or domestic. - You do not wish to relinquish any more ownership of your company to an investor in order to obtain additional financing - You lack the expertise to handle complicated financing arrangements being proposed by investors and lending institutions - You want to maintain a separation between your buyers and sellers; you do not want them to know each other. - You receive an emergency order and you want to take the opportunity to make additional profit.
How Does The Entire Process Work?One very important point: purchase order financing pays for the actual costs of filling the order. The advance is not intended to provide any extra money such as for your company's future operating costs. It is intended to get you through fulfilling the present order. The advance usually has to be paid back when the product is delivered to the customer. There is a small fee for this service, it varies with each job and the time frame involved, but is usually 1%-5%. Once the product is delivered to the customer, you will normally issue an invoice - if you sold the product with terms (30-, 60-, 45-days, etc). At this point, you will want to factor that invoice with an invoice factoring firm. You will get the funds sometimes within a few days to pay back the purchase order advance. Factoring will normally provide you with around 80%-90% advance. With this factoring advance, you will pay off the purchase order advance in full. You get to keep the remainder of the factoring advance. Then, when the bill is paid, you'll get the rest of it, minus a small factoring fee of 1%-5%. The sheer power of purchase order funding to solve many types of cash flow issues is clearly seen in the following example: You get an order for $200,000. You do not have the funds available to purchase the raw materials, assemble the product and ship it to the credit-worthy customer. You approach a purchase order financing firm for a purchase order advance. The firm analyzes your operation and calculates that you can produce and deliver the order to your customer for $150,000 (25% profit margin). Therefore, they advance you this amount because your customer is credit-worthy and will likely pay you what they owe you. They will also expect a 3% purchase order financing fee ($4,500). So, in the end, you would owe the purchase order funding company $154,500 ($150,000 advance and the $4,500 funding fee). At this point, you will want to find an invoice receivables factoring firm to factor the $200,000 invoice. Again, your business' credit is not in question, your customer's is. The factoring firm will provide a 80%-90% factoring advance. For instance, if it is 80%, that means the factor will provide you $160,000 ($200,000 x 80%). With this $160,000, you would pay off the pruchase order advance firm's $154,500 debt. This would leave you an immediate $5,500 ($160,000 - $154,500). Meanwhile, the remainder of your money ($200,000 - $160,000 = $40,000), is tied up with the factoring firm. The factor will collect on the $200,000 invoice from your customer. After the 30 day term, your customer pays the $200,000 invoice to the factor. The factor will retain his $160,000 factor advance. Then, he will subtract his factor funding fee (let's say, 3% of the $160,000 advance or $4,800). Finally, the factor will send you the remainder of the $40,000 from the invoice (minus the factor fee, of course). So, you will receive $35,200 ($40,000 - $4,800 factor fee) in hand. Therefore, all toll, you will have received $40,700 ($35,200 + $5,500) from the $200,000 invoice. You will have paid a total of $9,300 in fees ($4,500 purchase order funding fee + $4,800 invoice factoring fee). The real value in this entire process is the fact that you were able to accept and fulfill a $200,000 order when you did not have the funding to do so. That is the true value of purchase order funding. There is a trick to the above process however: When you select a firm to finance your purchase order, ensure that same firm can also provide invoice receivables factoring. That way, you will have a much easier time coordinating the factoring advance. Having one firm perform both functions greatly streamlines the process and makes all interactions flow more smoothly. This will allow you to grow your business, accept more orders, build up a good reputation with suppliers, customers and banks.
What Are The Benefits Of Purchase Order Financing?Purchase order funding has many advantages: - It can pay for the cost of goods directly to suppliers - It frees up cash for other critical business expenses - It can help companies ensure timely deliveries to customers; it can allow the company to grow without increased bank debt or selling additional equity - The company can use purchase order funding to increase market share. Purchase order financing is available for finished and non-finished goods, with finished goods being generally easier to finance. These finished goods go directly from a company’s supplier to its end buyer. The company never actually takes possession of the goods. They act as “go betweens” or middlemen in these type transactions.
What Are The Drawbacks of Purchase Order Financing?Purchase order financing does not come without cost or good amount of paperwork. Because the funding organization assumes so much risk in these deals, to qualify for purchase order funding, the manufacturer, importer, exporter or distributor must provide a wealth of financial information about his company; his buyer and supplier; and the buyer and supplier invoices. Additionally, the entire transaction relies upon the credit, track record and trustworthiness of a business' customers.
What Do You Look For In A Purchase Order Financing Company?here are different types of companies with different types of rates for purchase order funding. Any purchase orders to the amount of $100,000 can also be factored immediately. The average rate payable for discount in such cases is 2-5%. Some agencies specialize for a certain category of purchase order funding. For example, some agencies indulge only in funding for the medical industry. Some agencies, which cater to small and medium businesses, provide immediate funding online. They usually give a 24 hours turnaround. Other types of agencies also give funds to small businesses for their day to day operations against collateral of their purchase orders. These kinds of agencies also buy mortgage notes, structured settlement annuity or medical receivables. Bottom line: purchase order financing is an indespensible part of small-to-medium-sized business financing. It may be the best alternative for companies faced with huge orders and very little money to complete the transaction. Purchase order funding may just be the ticket you have been looking for.
Are you seeking purchase order funding? Are you a business owner in need of a cash infusion? Do you have a big order to fulfill and need money to purchase raw materials, manufacture the products and ship them? Are you unsure of what to do next? Confused? Don't know where to turn? Need help? Don't know whom to trust? Then, you have come to the right place. At learn-about-cash-flow.com, we are here to provide you the help and guidance you need. So, what's your next step?
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