How PO Financing Can Save Lucrative Deals

  • January 5th, 2012
  • Dan Bischoff

Note: This is a guest post by Richard Eitelberg, CPA, and founder/president of Hartsko Financial Services, a 10-year-old purchase order financing firm based in Bayside, New York.

How PO Financing Can Save Lucrative Deals

Click the image to see the entire infographic comparing PO financing with AR financing

Purchase order financing is a valuable financing tool for small business owners and entrepreneurs, which is underutilized because it is misunderstood.

If an enterprise has an excellent relationship with a bank, factor, or asset-based lender — especially when more cash is needed on a short-notice basis — PO financing most likely will not be a necessary tool for business financing. If the business is missing out on an opportunity to earn profit on a transaction because of a lender’s failure to follow through, purchase order financing maybe the only option.

Related Post: What the Heck is Purchase Order Financing?

Many times, this especially rings true for small businesses with questionable financial statements, weak credit scores, a problematic history, perhaps, even a bankruptcy.

The typical small business owner looks for PO financing when there are no alternatives left, as a last resort to preserve a deal with income-earning potential. Often, the purchase order finance firm gets called upon under critical, emergency pressures.

Related Post: How Invoices Can Get You Funding

Why is a purchase order financing firm able to assist when bankers and other lenders have rejected the business?

Because the purchase order financier is NOT loaning money to the business.

It is merely buying the merchandise of the purchase order issued by a credit-worthy company acquiring goods for resale. When the purchase order gets issued, the financier and his client (typically a manufacturer, a supplier, a distributor, a vendor, a reseller, an importer), make a contract with the source that will be producing the goods. The purchase order financier guarantees payment to the source through a “letter of credit” and/or payment, direct to the client’s supplier upon the goods being shipped and arriving properly at their destination.

Related Podcast: Entrepreneur Addiction Podcast #4 — ‘Hot and Steamy’ Alternative Financing

When the goods get confirmed according to the terms of the purchase order—the purchase order financing firm gets “taken out” either by a third party such as, a receivable lender, a private equity firm, or some source of cash or back-end letter of credit.

PO Financing Details

Generally, PO financing deals run from 30-120 days, for amounts in the range of $50,000-$5,000,000. If a business stood to make a minimum 30% on a deal — the business owner may have to incur between 3-4.5% per month for a finished good transaction, and 5-6% per month for WIP transaction negotiated.

In essence, without laying out any real money for the deal, the business owner has been enabled with this cash flow and an opportunity to earn profits without any use of their funds. The purchase order finance firm has earned fees for putting its funds at a risk — which no bank or other lender would accept.

Another feature is that purchase order financiers generally have abundant knowledge and technical information on how these transactions work, where to go, etc. And they are accustomed to seeing the financing process consummated under distress emergency issues.

Look for a purchase order finance firm that is recommended by one of the two peer review industry associations in this sector: the Commercial Finance Association (www.cfa.com), or the International Factoring Association (www.ifa.org). Generally their endorsement means the firm has been properly vetted, operating with ethics and standards.

For many business owners, it is wise to test drive the purchase order finance process by actually experiencing a deal, even if other financing is available. This way the business owner becomes prepared with a backup facility and a relationship, if their first-choice lender encounters a problem.

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About the Author

  • Dan Bischoff

Comments

  1. Hello, I have recently been trape with unsufficient funds to pay for commodities I need to suppliy to my clients. I have already set up export business from Brazil and Thailand to clients I have in West Africa. This is going to be use pay financial company so I can lease or open new BG (bank guarantee).
    I also have such company who could set me up with the BG. The fees needed is $450,000.00 one time payment.
    Thereafter I transfer the BG to supplier’s account and shipment starts.
    However the funds taken as loan shall and will be with no doubt return in full including interest within 45 days.
    Trading these commodities and channel I have is very profitable within short time and business itself is for long term.
    If there is any one out there who could help me, you will never regret with your investment.
    You reach me @ 801 244 5463.
    Residing in Salt Lake City Utah.
    Thank you