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Purchase Order Financing
1st Commercial Credit offers a broad selection of purchase order financing for your manufacturing, domestic or international trade financing needs. Purchase Order Finance is available for U.S. based companies with a proven track record in their industry.
Our areas of expertise include production finance for work in process and Letters of Credit for trade finance, including import and export transactions as well as domestic trade purchases. We can work in conjunction with factoring or accounts receivable financing sources to provide a complete business solution to turn purchase orders into receivables.
Purchase Order Financing is short term financial solution used to finance the purchase or manufacture of specific goods that have been pre-sold by the client to its credit worthy end customer. Funding involves issuing letters of credit or providing funds that allow clients to secure the inventory they need to fulfill pending orders.
Should You Use Purchase Order Financing?
Every once in a while, it is a good idea for business owners to become familiar with alternative forms of financing that can help their business to grow. Purchase order financing is something that you may have heard people talk about, but you are not so sure as to what it really is. Let's take a look at purchase order financing and decide if it is right for your business or not.
First of all, we can safely establish that purchase order financing is not a good way to do all of your business. There are plenty of situations where it is appropriate, but it is not something that you should plan on doing all of the time. The best way to understand purchase order financing is to run through a couple of examples as to how it works and then discuss its viability for your business.
1st Commercial Credit can facilitate financing programs that help your sales growth. More specifically, our purchase order or trade finance programs fund sales transactions up to 100% of the capital requirements. Most commonly, these transactions start in the form of a written purchase or sales order from your customer for specific goods. Our clients find themselves in one of three situations:
- Sales growth is outpacing available working capital or bank credit lines.
- Seasonal sales spikes or growth spurts put a sudden strain on cash flow.
- Working capital must be preserved for other mission critical operations such as R&D, manufacturing or capital equipment.
What is the Purchase Order Financing Criteria
- Must be in business for at least one year.
- Must have experience and previous transactions with client or other similar clients.
- Must have at least an initial $100,000 transaction minimum.
- Must have a viable purchase order from a credit worthy customer or a Letter of Credit that satisfies our criteria.
- Must retain a minimum of 25% profit.
- Must be a USA company.
- Learn more about preparing for the application process for purchase order financing.
What is considered in a Purchase Order Finance Transaction?
- Industrial and Manufacturing
- Wholesale distributors/ importers and exporters
- Government Contracts
- Service Contracts
- Retail and Apparel
- Direct shipment/Drop ship orders
- Project funding for the following costs:
- Raw Materials
- Components and Sub-Assemblies Project-specific Labor
- Finished Goods
- Direct Manufacturing
- Letters of Credit
- Letters of Guarantee
As A Way To Ship Big Orders
ABC Company is a small business that manufactures widgets that ship all over the world to retail stores. A retail store in Wisconsin places an order for 10,000 widgets, which is a significant order. ABC Company does not have the cash on hand or the credit with vendors to get the materials to fulfill the order, so ABC Company turns to Purchase Order Financing Inc. for help.
1st Commercial Credit (PO Finance Company) investigates the credit status of the Wisconsin retailer and decides that the retailer has the credit to pay for the order. Po Finance Company then issues a letter of credit to ABC Company's vendors and the materials are shipped to ABC Company. As soon as ABC Company ships the widgets to the retailer, PO Finance Company pays ABC Company the difference between the costs to the suppliers and the total value of the purchase order, minus the fees for the PO Finance Company. The retailer then pays the total value of the purchase order to PO Finance Company
As A Way To Finance Company Projects
ABC Company wants to build a $10,000 addition to their manufacturing facility, but they do not want to take out a bank loan to do it. ABC Company finds out that a retailer client in Wisconsin is getting ready to issue ABC Company a $20,000 purchase order, but the retailer wants 90 days to pay.
ABC Company accepts the retailer's purchase order and then immediately offers the purchase order to PO Finance Company The entire process happens just as it did in the first example and ABC Company gets its money (minus supplier costs and Po Finance Company's fees)in 30 days instead of 90, which allows them to break ground on their building addition. When the retailer is ready to pay the purchase order in 90 days, it pays PO Finance Company.
As you can see, the idea behind purchase order financing sounds pretty great. The customer gets its product, the vendor gets its profit and the supplier gets its money as well. The problem with the process is the fees charged by the purchase order financing company on the transaction.
When you use a purchase order financing company, you have to take their fees out of your profit and that can really affect the company's bottom line. This is why this kind of funding is only used for larger orders where there may be a little more profit margin to play with. If this were used on smaller orders, then it could really start to diminish the company's profit margins.
On the other hand, purchase order financing is the ideal solution for a company that wants to fulfill that large order, but it does not have the financial resources to do so. When you have a relationship with a reliable purchase order financing company, then you have a great way to grow your business by taking on large purchase orders that could generate significant profit.
What Should a Purchase Order Always Mention About the Transaction?
A small business does not need an expensive legal department to understand how a purchase order works. The biggest misconception about a purchase order is that it is a legally binding document. This is true, but only under certain conditions. In order for the purchase order to be legally binding, both parties must agree to it and the vendor must satisfy all of the conditions of the purchase order. That means that a vendor cannot collect on a purchase order until it has done its part to satisfy the order.
The wording on a purchase order is critical to its success. Most companies get purchase order forms that outline all of the blanket conditions of the transaction. A blanket condition is something that applies to every order. Examples of blanket conditions include the payment options, return policies and shipping policies. The information that is specific to that order is also important when being printed on a purchase order.
This section will outline the payment terms of the transaction as the buyer understands them. If the seller has a different view of the payment terms, then that should be discussed before the purchase order is made final.
There are two specific elements of the delivery date that should be included on every purchase order. The first element is the date itself. In most cases, the delivery date is negotiated between the seller and buyer in advance of creating the purchase order. The other element that should be included is an indication as to whether or not that delivery date is firm. If a product is critical to the success of a project, then the customer may need the delivery date to be firm. If the product is not critical, then a flexible delivery date can make the relationship between the buyer and seller much smoother.
Product Or Service Details
The product or service details need to be extremely comprehensive. These are some of the more important conditions that the vendor will be held to when it comes time to pay on the purchase order. The buyer needs to outline the exact terms of the service or specifications of the product on the purchase order for it to be effective. A general or vague product or service description could wind up causing confusion and delay payment.
A purchase order should include the unit price, the number of units, the total price, a subtotal, any shipping and handling charges, any taxes or other fees and then a final purchase order price. The complete purchase order pricing goes right along with the product or service details as one of the more important parts of the purchase order. Be sure to include all elements of the pricing on the purchase order so that there can be no confusion between the buyer and the seller.
It is always interesting to see how many companies forget to put complete contact information on a purchase order. If this information is not complete, then the vendor may not know who to contact if there is an issue.
Comprehensive Shipping Information
If a buyer does not want his product shipped to the wrong location, then be better check his shipping details on the purchase order before issuing the order. A vendor will ship to whatever location is on the purchase order. If the customer has special shipping instructions and does not include them on the purchase order, then the buyer will have created an issue that the vendor will not be responsible for.
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