Purchase Order Funding Provides Instant Cash From Invoices And Contracts
Keywords: purchase order funding, PO funding, transaction financing, cash flow, factoring, working capital
Regardless of business size or stage of development, every commercial enterprise is dependent on sufficient and adequate cash flow in order to grow and prosper and purchase order funding can be a part of the solution. Whether maintaining existing operations or attempting to expand, it can’t happen without sufficient cash flow, either internally generated or supplied externally.
Purchase order funding provides a readily available source for internal financing - immediate access to capital from existing invoices or purchase orders. This financing provides your firm with the money in order for you to perform an invoice or contract requirement before it becomes a receivable.
Purchase order financing typically provides 100% funding based on qualified pre-shipment documents, purchase orders, invoices, and contracts. This is true even for international or export/import transactions. The quality of the transaction and its support documentation becomes the determining factor in the deal, not the balance sheet or income statement of your company.
Early stage, mature and start up companies use PO funding. In each case, the company has successfully marketed its goods or services, and has a bona fide sale lined up with the buyer. The only missing link is the financing needed to complete the order.
Commercial banks are not prepared to fund these types of high-risk endeavors. Since there is as yet no receivable, factoring is not a financing alternative. Supplier financing, absent a track record of sales of sufficient magnitude or frequency, will either not be present and inadequate. In fact, the need for immediate financing help often arises because the supplier has reduced or changed the terms of supplier financing. The unfortunate result is that the company has a solid contract or sales opportunity and no way to perform due to lack of financing. In a distribution situation, the lack of financing can kill the business.
With transaction or purchase order financing, the level of funding is primarily geared to the quality of the underlying sale, not the overall financial position of the borrower. The quality of the sale and the creditworthiness of the buyer are the prime factors of risk to be considered in giving the firm 100% financing including related shipment costs. If delivery and acceptance of the goods or products depend on fabrication, assembly, or some other additions by the firm, then the track record of your company in successfully attaining delivery, acceptance, and payment must also be considered.
Typically, transaction financing provides 60-90 days short-term funding (usually at some cap per transaction), often up to 100% payment to the supplier of the products. This in turn allows the company to complete and satisfy the contract with immediate delivery and performance to the client.
Fees or costs to the financing source for this funding may be in the form of an initial charge and/or monthly discount from the proceeds of the sale. The cost rate for that discount may vary by transaction based on how long within the 60-90 day period it takes to get full payment from your client and the perceived risks as to payment for the financing.
From the owner’s or CEO’s perspective, access to purchase order funding (used either singularly or in conjunction with other sources) can literally be the key to real and sustained business success. It can result in larger sales opportunities, faster growth potential, stable cash flow, and increased profits. Most importantly, it builds a solid track record of sales and profitability - both key ingredients for banking and supplier confidence.
Kent Harlan has been a CPA since 1984 and is the owner of Ozarks Capital Funding, a Missouri-based company offering financing in the areas of accounts receivable factoring, equipment leasing, asset based lending, and financing for healthcare providers.
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