Scenario: After much hard work, you finally secure that large purchase order from a creditworthy client.
Congratulations!
However, you have nowhere near enough working capital to buy the product to fulfill the order. What can you do? You have heard of Purchase Order financing, but don’t understand how it works, whether you qualify or how to get approval. Also, how does PO Funding differ from Invoice Factoring? First, let’s discuss the mechanics of both tools to get you more working capital.
Purchase order financing gives companies a short-term solution for funding the inventory required to complete sales transactions. Importers, exporters, distributors, wholesalers, outsource manufacturers, Government Contractors and assemblers can all utilize PO Funding where:
- Growth is outpacing capital
- Spikes in seasonal sales are straining cash flow
- Over-advances from the senior lender are not available
- The company can’t obtain enough credit from vendors
- The company is making a transition from the U.S. to foreign manufacturing
- The overseas manufacturer needs payment assurance to start production of goods
- The company is in turnaround mode
The Steps of PO Funding
- You have an order from a creditworthy client
- Your margins are at least 20%
- Your vendor is reputable
- The Purchase Order from your Client matches what your Vendor can deliver
- Your Vendor agrees to a Letter of Credit or some Payment Guarantee
- The Goods or Product are shipped by your Vendor or a Trusted Freight Broker to your Client
- Your Client will verify the subsequent Invoice generated
- According to the terms, your client pays the PO Funding Company or Invoice Factor
- PO Funder or Invoice Factor remits you your profit!