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Cash Flow Problems Answered with PO Financing
Aggressive Financing for Small BusinessesGrowth of 20 to 30 Percent Using Purchase Order Financing | Purchase Order Financing - Increased Cash Flow for Small Businesses | 11/15/05
| The Problem
Timing is everything when you are a small company with a large purchase order or contract in your hand from a new customer. Larger competitors have an advantage, retained earnings allow them to offer flexible financing terms while most small companies use deposits to fund orders for the three- to four-month period it will take to get paid. Some potential clients, particularly government agencies, will not advance a “down payments.” Constricted cash flow found in most small growth companies will hamper growth. The window of opportunity is generally short, and if you’re not there to at least bid on a project, the new customer may not be there the next year or the following year.
A good accountant may recommend purchase order financing, a form of asset-based lending that allows a company access to credit in order to pay suppliers, laborers and other intermediaries for goods or services they need to generate additional sales. For rapidly growing companies, the need for capital is often acute. Large orders, seasonal sales,or market expansions can place a great deal of pressure on a business’s cash flow. This cashflow pressure can jeopardize future sales. Once a company is through this growth period requiring purchase order financing, they can go back to receivables financing only to provide needed cash flow.
What is Purchase Order Financing
Purchase order financing is aggressive financing that a bank normally won’t do on the frontside of large projects. PO financing can add 20 to 30 percent in growth opportunities right away. Purchase order financing is used to acquire inventory. In exchange for advancing funds for finished or nearly finished goods that have been sold and some times, a small amount of inventory. The lender will earn a percentage of the cost of the goods, usually in the range of 3 to 5 percent for a 30 to 45-day transaction. The cost will vary depending on how the deal is underwritten. While different lenders will have industry preferences, most transactions are similarly structured. The funds advanced will be directed toward the manufacture of goods that will fulfill a purchase order. This type of financing fills the gap between traditional bank or asset based financing and equity.
Purchase order financing is geared toward wholesalers, distributors, or importers that outsource production of the products sold under purchase orders or cash deposits. Purchase order financing can augment and work with bank or venture capital funding. A company may have an equity partner or venture capital group that has supported the first few rounds of capital raise, however they are not excited about putting in additional equity. They canleverage off the PO funding because the PO funding source is providing transaction capitaland don’t typically take an equity position in a company.
Qualification
Qualifying for Purchase Order Financing can be summarized as follows:
- Your product must be broadly re-saleable;
- Your company and product must be established and proven in the marketplace;
- The suppliers must know the sellers product and be able to produce the product on time and meet the buyer's terms. The supplier must also be a manufacture with a good track record of producing the type of product specified in the purchase order;
- The PO finance company must factor all invoices generated from the completion of the
purchase orders financed to insure repayment. In some cases they will work with a third
party factor that will advance against the invoices generated by the PO financing under an inter-creditor agreement;
- The company(s) purchasing the goods must be credit-worthy;
- The purchase order must be verifiable;
- Payments made under purchase order advances must be made directly to suppliers;
- Purchase order finance companies may also require collateral in addition to the purchase order.
If you are a new business and you land the largest order your company has ever received, it's exciting. Than on second thought, is it? You’ve mentally added up all the money you can make and all the future business it may bring, but you know you do not have the cash flow to realize the dream. Look to Purchase Order Financing to grow your dream. |
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