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PO Financing
Purchase Order Financing | Purchase order financing allows the client to minimize the cash needed to grow. | 03-06-2006
| Imagine this situation. You have a company that supplies widgets to other businesses. This imaginary company buys widgets from its suppliers and repackages them and re-sells them to the other businesses for a mark up. This is a very common scenario.
Now, lets assume that this company is extremely successful. As a matter of fact, it is doing so well that it is selling widgets as fast as it can buy them... Now, like most companies that sell to other companies, the business has to offer net 30 day terms. This means that sooner or later growth will hit a wall, because it will eventually run out of cash. From a profit and loss standpoint, the business will be doing great because it is invoicing a lot. It just will not have any money in the bank. It will all be tied up in sold product that has been invoiced but not yet paid.
Now let’s apply purchase order financing.
With a PO funding agreement in place, the business could grow, as fast as it could sell widgets. There would be no wall.... Let’s take a look at the new scenario.
First, the business buys widgets from it's manufacturers under a letter of credit backed up by a PO from a customer. Second, the purchase order financing company funds the purchase through an payment instrument which results in the sale being made and the product being delivered. Most of the time, the sale is made without using any of the clients cash. Finally, once the customer pays for the widgets, the transaction is settled. You see how this would enable a business to grow. Purchase order financing allows the client to minimize the cash needed to grow.
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