09/13/11

What the Heck is Purchase Order Financing?

And Why Should Business Owners Care?

What the Heck is Purchase Order Financing?Many business owners who are unfamiliar with the many forms of commercial financing, misinterpret what exactly Accounts Receivable Financing or Purchase Order Financing can do for growing a business.

The biggest misconception people make is something like:

“I am about to get a big purchase order and I need some working capital to get it started.”

So, first of all, P.O. Financing will not pay you cash up front so you can start working on an order. It also will not provide capital upfront to purchase inventory to be sold at a later date (when a purchase order comes in.)

The typical P.O. Financing scenario is:

This is a very clean example of where the purchase order finance company steps in.

First, the finance company needs to actually see the P.O., to see if it’s real and has been issued. Next, they determine whether the purchaser or account debtor (customer) has qualified for credit on the sale. Then the supplier side of the equation is introduced and due diligence is prepared to know exactly where everything is going, how long it will take, breakdown of the costs, etc.

Ultimately the P.O. finance company is going to issue an Irrevocable Letter of Credit made out to the supplier. When the supplier ships the goods, has the order inspected, and the required documents sent to the bank, the supplier will be able to invoke the letter of credit made payable to their bank, and be paid for the shipment.

4 things to know about Purchase Order Financing:

An over looked aspect of purchase order financing is having a professional finance company oversee the issuance of the letter of credit and deal with inspections of the shipment. Banks can be tricky enough with letters of credit, but many problems can arise when you add a foreign country where the supplier is located. Having the experience of a good finance partner can make all the difference.

About the author
What the Heck is Purchase Order Financing?Gary Honig has been active with the factoring industry since the early 1990’s where he began as a business development officer for the existing Creative Capital Associates. In March 1997 he spearheaded a takeover of the company and reformed it as a Maryland corporation. Mr. Honig has been at the helm since and oversees all aspects of running CCA which still provides commercial invoice factoring nationwide. He is a participating member of the International Factoring Association (IFA) which is the long standing factoring industry association. He is routinely called upon as an expert with thorough knowledge of the receivables factoring industry.
He can be reached at [email protected] and on Twitter @garyhonig.

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