- What is purchase order
funding?
Purchase order funding (a.k.a. PO funding) allows your company to
purchase goods from your supplier or fund manufacturing of product to
complete an order to your
company from a creditworthy customer when you lack the working capital
to do so on your own. The order may be for
finished goods that you acquire from a domestic or foreign supplier,
and then deliver to your customer. The order can also be for
goods that require some amount of manufacturing or repackaging before
being delivered to your customer. By being able to complete
the
order you maintain the relationship with your customer and have the
opportunity to receive future orders (and profits) from that customer.
- What transactions do not
qualify for purchase order financing?
Purchase order financing cannot
be used in the following circumstances.
- services (only goods qualify for purchase order
funding) (e.g. custom or semi-custom software does not qualify
for purchase order financing)
- goods that will become part of a building or real
estate
- goods delivered on consignment (your customer cannot
have
the option of returning the goods)
- goods with no specific delivery date (purchase
order financing is not inventory financing)
- goods that require long production cycles (e.g. 90 to
120 days) because the cost of the purchase order financing will become
too great
- goods being manufactured by companies with little or no
experience in manufacturing that type of product
- the customer is not creditworthy (your customer
must have a good history of paying their bills)
- What types of
purchase orders do you fund?
There are 3 types of purchase orders. They are listed in
increasing degree of difficulty for obtaining purchase order
funding. For the last two the financial strength of your company
and
experience of your company in doing the manufacturing or repackaging
are
very important.
- purchase orders for goods that are purchased from
your
supplier in a finished state (you are probably a distributor,
wholesaler or importer that simply ships the product to your customer
without any manufacturing or repackaging by your company)
- purchase orders for goods on which your company
performs light manufacturing or repackaging (e.g. importing of
electronic components that are tested and then repackaged before
delivery to the customer)
- purchase orders of component parts on which total
in-house manufacturing is done to produce the product being purchased
by the customer
- When should purchase order
funding be used?
Purchase order funding should be used only when most other forms
of financing have been exhausted. For example, the following options
have been considered but cannot be used for reasons shown.
- credit lines cannot be
expanded
- real estate, inventory, and equipment cannot be borrowed
against
- receivables cannot be sold.
- What minimum gross profit
margin should the purchase order have?
We recommend a minimum gross profit margin of 30% on transactions in
which purchase order funding is being considered. You should determine
if the transaction will still be profitable after paying the purchase
order and accounts receivable financing fees involved in purchase order
funding.
- What types of companies
should use purchase order funding?
The following types of companies that are selling to a creditworthy
customer can use purchase order funding.
- distributors
- wholesalers
- manufacturers having strong financials and with
experience in the type of product
for which the purchase order funding is being requested
- Can a manufacturer use
purchase order funding if they do not have experience in manufacturing
the product?
Maybe. It may be possible for a manufacturer to obtain purchase
order funding if they subcontract the manufacturing of the product to a
company with experience in manufacturing that type of product.
- Is a personal guarantee
required to obtain purchase order financing?
Yes. A personal guarantee is always required to obtain purchase order
financing.
- How important are the
financials of my company and its principals in obtaining purchase order
financing?
The importance of the financials of the company and its
principals increases as the risk of satisfying the purchase order
increases. For example, your company cannot be in danger of
becoming insolvent during the term of the purchase order. The
amount and complexity of the manufacturing required to deliver the
product increases the risk that the purchase order will not be
satisfied. Therefore, the financial strength of the company and
its principals together with experience of the company in satisfying
similar purchase orders becomes more important when deciding to approve
a purchase order funding request.
- My bank already has a lien
on all my receivables. Can purchase order funding be gotten in
this situation?
Maybe. It will be necessary to obtain a subordination agreement
with your bank on that portion of the receivables generated as a result
of the purchase order funding transaction.
- What transaction size will
will you consider for purchase order funding?
The range for standalone purchase order transactions is about $250,000
to $2,000,000. The minimum for recurring purchase order
transactions is about $50,000 per month.
- How much will you advance
on the purchase order?
The amount that will be advanced on the purchase order will be the
minimum required to get the order to an invoiceable state. For
example, for finished goods, the advance would be the amount required
to
buy the goods from your supplier and might also include the cost of
freight, insurance, and inspections.
- In what form will the
purchase order funding payment be made?
The purchase order funding payment can be made in the following ways.
- check
- wire transfer
- ACH
- letter of credit (usually used on international
transactions)
- How is the purchase order
funding advance paid back?
The purchase order funding advance may be paid back in the following
ways.
- proceeds from a letter of credit to your company
from
your customer stating payment will be made when goods are delivered
- accounts receivable financing of the invoice that is
presented
when the goods are delivered to your customer
- purchase by a leasing company when the goods are
delivered to
your customer
- What documents will you
need to see as part of the application for purchase order funding?
The following documents will need to be provided along with a completed
application form. However, please do not provide these documents
until requested to do so as part of the application process.
- Copies of Articles of
Incorporation and By Laws
- Copy of Fictitious Name Filing (if applicable)
- Copy of Partnership Agreement (if applicable)
- Financial statements
- Schedule of aged accounts receivable
- Copy of 941 withholding tax filings & proof of payment
If you have additional questions, or if you would like to start the
process to see if your purchase order qualifies for purchase order
funding, please
click here
to contact us.
Call us now at 1-800-598-1178
to get started.
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