How To Finance Those Large Purchase Orders

Business.com / Strategy / Last Modified: February 22, 2017

Purchase Order Funding does not need to be a complex and invasive funding process, read these Q&A's to learn more about the product.

A lot of people think of Purchase Order Funding as a complex and invasive funding process.

While I never saw it that way, I guess I understand some of the hesitations of those who may not fully get it.

After speaking with a few entrepreneurs today and hearing their initial thoughts on the process, I decided to put together this simple FAQ to help explain a little more about the product.

Related Article: To Borrow or Beg: Small Business Funding in 2015

What Is Purchase Order Funding? 

Purchase Order Funding is a great tool for businesses to use to help finance the production or acquisition of products for re-sale. If a company is in need of capital to fill larger purchase orders from their customers Purchase Order Funding is a way to secure the necessary capital. This is typically done by the finance company paying your vendors directly to help acquire the goods while the same or another finance institution secures their position by factoring the resulting receivable.

How Are Letters of Credit Used to Finance My Production?

A Letter of Credit is issued by the client’s (buyer) bank to the vendor’s (sellers) bank to serve as a guarantee for payments to be made when the vendor performs as promised. Certain terms are issued within the Letter Of Credit that must be met in order for the seller to get paid. Terms may include quantity, quality and timing to be confirmed by a third party inspection to be made post production.

How Does the Purchase Order Funding Process Work?

Submit the Purchase Order from your customer along with the pro-forma invoice from your vendor to your Purchase Order Funding company. The account executive will prepare a transaction review and submit the information to the bank for a Letter of Credit to be issued. If a Letter of Credit is not required the account executive will prepare for alternative methods of payment to satisfy your vendors. Once goods are delivered to your customer your lender will factor the resulting receivable and await payment.

Related Article: Top Tips to Ensure Clients Pay on Time and Increase Your Cash Flow

Can I Use Purchase Order Funding if I am Already Working with Another Lender?

Yes. Purchase Order Funding is a fairly specialized product. Very few companies provide purchase order funding. Most factors and asset based lenders will work with a Purchase Order Funding company to handle the pre-receivable financing or the production while they finance the resulting receivables. In these cases a simple intercreditor or tri-party agreement is drafted and signed by all parties involved. 

How Long Does the Funding Process Take? 

The funding process can be completed in just a few hours depending on the complexity of the transaction, payment method and communication with the vendor or factory. Letters of Credit can typically be issued within 24-48 hours once the transaction review is completed. DP and other forms of payment can happen within hours of a certain request.

What Types of Orders Can Be Financed Through Purchase Order Funding?

Purchase Order Funding can satisfy purchases of finished goods and work in process. As long as there is a credit worthy end customer and a qualified vendor, Purchase Order Funding can be used to cover the costs of production. Work In Process can sometimes be a bit more complex to finance as there are a number of vendors to be paid to fill a single Purchase Order.

What Should You Look for in a Purchase Order Funding Company?

A strong purchase order funding company should have experience buying goods internationally, a strong expertise in shipping and logistics, and an understanding of your production process. Purchase Order Funding is capital intensive and requires a very specific working knowledge of the goods to be funded. Working with the wrong partner can lead to missed shipments, frustrated vendors and cancelled orders leaving you with a major liquidation on your hand.

How Much Does Purchase Order Funding Cost?

Pricing for Purchase Order Funding varies with the size of the order, type of financing used, and length of the transaction. A good Purchase Order Funding company will help you structure your transactions in the most cost effective way possible.

While the above doesn't explain it all, hopefully it's a start. If you have any additional questions please don't hesitate to email me at alevine@starfunding.com. 

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