Purchase Order Financing has been around for a long time. This usually involves several parties in the transaction and there are many variables in the underwriting process to consider. The mechanics of funding the transaction may vary by industry sector and your business model.
If your business is considering a purchase order finance company as an alternative lending source, you should be prepared and research on how the finance company will review your business for approval.
Based on the findings of your research, it is suggested to implement changes to address the concerns a lender may have in approving your request. Positive changes can make your transaction more attractive for a larger scope of lenders and can be the difference between an approval or not.
This article contains many questions to research for your business, and see if your business will be a fit for a PO finance company.
PO Financing involves a specialized lender that provides transactional financing to a vendor/business (the Applicant) to help process an order requested by a credible account debtor (Customer being sold to). The financing arrangement is not a long-term loan that you make payments on but rather more of a single investment into the transaction that will convert to an invoice within 30 to 120 days when the product is delivered. The fees calculated in po finance is based on many variables, and fees can vary between 1% to 15% of the transaction value.
Keep in mind, the mechanics of the po finance is to fund the transaction and get it to a deliverable state whereas the the product is accepted by the account debtor and the business can generate an invoice. Once it becomes a receivable then the po finance company is paid off by a factoring company or the account debtor. The majority of po finance companies will not factor the invoice, so arrangements should be made on how the po finance component will be paid off.
Many things will be considered during the review process and it all comes down to risk, type of product/services rendered, number of days it will take to get it delivered, transaction history between vendor and the account debtor, and one of the most important of all “Gross Margin”.
Risk – The Longer your business has been around the less risk the lender may have. However, that is only one of many components reviewed.
How is the Purchase Order structured and what is the Account Debtor Credit Strength:
Suppliers and the Vendor/Applicant
Depending on the transaction, most lenders will not fund for inventory items not related to the purchase order being financed. In addition, other cost usually not considered is freight cost, customs/broker fees and labor cost.
Some lenders will provide up to 90% of the cost while some others require more from the vendor. Lenders feel that if the vendor has some out of pocket money in on the deal, they will see through that the order gets completed and delivered as requested on the terms of the purchase order.
A perfect storm in purchase order funding involves a vendor that’s new in business selling a new item in the market with no sales history, dealing with suppliers that want cash before shipping to an account debtor that’s ordering for the first time wanting a return guarantee if it doesn’t sell. The reality is these deals never get approved.
As a rule of thumb consider the following as a minimum for approvals:
1st Commercial Credit can accommodate both the invoice factoring and purchase order component including labor and freight cost involved. We use innovative ideas in funding transactions and each client is unique and we come up with a customized solution for each situation.