Cash Flow Solutions
A purchase order (PO) financing facility occurs when the financing client presents a verified purchase order to the lender to obtain funds enabling the client to obtain finished goods to complete the sale to their customer. Once the goods are delivered to the end-user, frequently on 30- or 60-day terms, it is common to factor the receivables to pay off the PO financing and access further working capital.
PO financing facilities involve three parties:
- Client – The PO financing client acts as a seller or distributor
- Customer – Procures the client’s product with a verified purchase order
- Manufacturer/Supplier – Produces the product and delivers directly to the customer
Capital Solutions structures Purchase Order Financing programs that cover two scenarios:
- Where our client acts as a reseller between already manufactured goods and the end-user
- Where our client has a verified purchase order and needs capital to manufacture or produce the goods
Typically, purchase order financing lenders pay only one supplier for finished goods. Production financing or work-in-progress financing where several suppliers are involved is more challenging to obtain.
Most purchase order financing lenders open a Letter of Credit (L.C.) to the supplier. PO lenders inspect the goods at the supplier prior to shipment. Variables in fees take into consideration the size of the L.C., repetitive business with the lender and length of time L.C. remains open
The maximum amount of purchase order financing available is determined by:
- The amount that will be invoiced to credit approved customers for delivered and accepted product.
- Eighty percent (80%) of the invoiced amounts must cover the supplier Letter of Credit opened by the PO financing lender plus the lender fees.
Integrating PO financing with factoring
The PO financing fees are the more expensive rates in a PO/factoring structure. The factor works in concert with the PO financing lender from the beginning of the transaction by credit-approving customers.
When the product is delivered to customers the invoices becomes eligible for factoring. The factor advances 80% of the invoices after verifications and uses those funds to pay off the PO finance lender through an inter-creditor agreement. Any funds remaining from the amount advanced are remitted back to your company. When your customer pays the invoice through the factor’s lock-box the reserve is remitted back to your company minus factoring fees.