Cash Strapped Entrepreneurs Leaning On Purchase Order Finance

Cash Strapped Entrepreneurs Leaning On Purchase Order Finance

An entrepreneur’s worst-case scenario: You land a significant sales order from a corporation or government agency, but don’t have the capital to pay the supplier/s.

If you can’t find some money — fast — your business faces the potential loss of the order and likely the customer relationship.

Entrepreneurs in this situation are gravitating towards private investment firms who offer to finance their purchase orders — purchase order or P.O. Finance has increased in popularity as bank lending slowed in recent months due to tighter restrictions and softening property values.

P.O. lenders have been around in some way, shape or form for decades, companies in the market, such as Stak Trade Finance, launched in the past couple of years due to a massive gap in expertise funding outside of “traditional” credit assessments or asset types.

Even if your company has seen its credit rating beaten up in recent years, a purchase order financier is willing to work on a structure to suit you. The provider considers the credit rating of your buyer (or end customers), not your business.

If the customer (or end buyer) is a larger corporate or government entity, the P.O. financier will have an initial healthy appetite to assist.

How a purchase order finance structure typically works:

  • Your business receives a large order from a strong creditworthy buyer. Your business is a product re-seller, distributor, or a direct manufacturer.
  • Your P.O. financier checks your customer’s credit history and approves the P.O. strength.
  • In addition to the payment to the supplier/s, the funder also pays the costs of shipping. Other inclusions are added in as required, such as inspections, insurance or duty costs incurred.
  • The goods are shipped directly to your end customer, bonded warehouse or your warehouse if approved.
  • Once the customer takes delivery of the product, your company invoices the buyer/s.
  • If the customer pays immediately, the financier collects the money, takes its cut, and gives your company the remaining profits. If the customer pays on terms, providers such as Stak will partner with a factoring company that may buy the invoice and remit the advance to the P.O. funder repaying any debt. The factor then pays your company the remaining profit once the end buyer makes the final payment.

This process of purchasing invoices at a discount is known as invoice factoring. Fees for factoring your invoices are usually reasonable given the delivery and acceptance risk has now been removed by the purchase order financier.

With P.O. financing, the provider is advancing funds based only on a written commitment to purchase. If the customer refuses the shipment, dissatisfied, goes broke during the transaction or for any other reason doesn’t pay up, the lender will suffer the loss. There is a larger range of issues that can arise in a P.O. deal, so costs are higher.

Getting P.O. financing isn’t always your first thought and can be challenging to find a reputable supplier. If It’s a decision between P.O. financing, selling equity in your business (and loss of control) or losing a large order, purchase order finance might be worth considering.

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