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With Purchase Order funding, there is a need for additional funding “before” you get to the invoice phase. I think of Factoring as the alternative financial tool of choice ONCE you have a completed service or product for which you are to the invoicing stage and Purchase Order funding as the tool of choice to help you get TO the invoicing stage.For instance, have you seen the Citi Bank commercials on TV lately?The one where the manager goes to the operations supervisor nervous and upset because they have just received a huge order for which they will need significantly more employees and materials to deliver?  The manager is upset because he doesn’t have a clue how they will have the needed resources to fill the order! Purchase Order funding would be happy to step in here as an off-balance sheet way of filling this order as opposed to more traditional debt models.Should a business hold back its sales efforts for fear of actually getting a larger order?Absolutely not!  Unfortunately, though, many business owners are unaware of the tools in this industry to help them leverage “Other People’s Money” to help self-finance their business growth and expansion.  The Citi commercial is a prime example.Fred Schmedt of The Samuel Noble Foundation says, “The use of other people’s money, called ‘leverage,’ is a tool that agricultural producers can and should use to harvest increased profits.”  The cash flow industry says not just agricultural producers should take advantage of this time-tested concept.Purchase Order funding is short-term funding used to finance the purchase or manufacture of specific goods that have been pre-sold by you to a creditworthy end customer. The cash advanced under PO funding is used to pay for the upfront materials and labor necessary to fulfill the order from a quality customer.  Once you produce, ship, and send an invoice for the goods - the funder will have a Factoring company buyout it’s interest.  The transaction then continues as a normal A/R factoring program. 
 
Contract funding is pretty much the same as PO funding but it is for a service as opposed to goods and there are many funders who specialize in this type funding as well.

Basically, though, they each (PO and/or contract funding) allow clients to accomplish the following:

  • Secure payment to a 3rd party supplier for finished goods that will be shipped directly to the end customer
  • Pay job-specific suppliers for raw materials
  • Pay job-specific labor
  • Pay for packaging, shipping costs, duties and inspections

Basic criteria for qualifying does rely on:

  • applicant’s business strength and performance (contrary to factoring which looks at the account debtors strength); 
  • applicant’s ability to satisfy the PO/contract; profit margins high enough to absorb the funding costs; 
  • size of purchase order or contract; 
  • number and quality of suppliers/contracts; 
  • existing factoring relationship

Alternatives to Purchase Order funding (advancing cash to suppliers) may be the use of Letters of Credit or Payment Assurance Letters. The letters insure your vendors that they will be paid on time, and how they will be paid.  When vendor’s minds are at ease, they often eliminate pre-payment and C.O.D. requirements and extend payment terms.

The advance amounts and fees vary depending on each situation. Typically, every transaction will stand on its own, based on business history, credit worthiness, the ability of the supplier to provide the goods or services.

Until next post, be Safe!  And Geaux Tigers!  Debra

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