The actual procedure for Purchase Order Finance is generally not well understood by many applicants which can often lead to confusion of what it really is intended to accomplish. And because of this common misconceptions, this many explanation of what PO Funding is intended to accomplish and how is incorrect.
Myth: PO Financing will allow your company to receive and advance against an order which you have with a creditworthy company and these advanced funds can be used by the borrower to pay for any costs related to the fulfillment of the order.
To begin with, when you are looking at financing a PO scenario, the PO that has been received needs to be issued from an entity which does have decent credibility as this company will be the one paying the invoice in the end and there must be a good assurance that the customer will in fact pay the amount due. The verified order form must be of a format which clearly displays the relevant elements of the proposed purchase by showing what has been purchased from whom and at what price as well as when the payment for the order will be made. Should any part of this information be left out or be ambiguous, the application for PO Finance application shall be unquestionably denied.
As aforementioned, the purchaser of the goods has to have acceptable credit. For many PO Finance Companies, the domicile of the purchaser is not critical so long as the purchaser can be verified to have a reasonable expectation to pay the bill when it is due.
From time to time, some PO Funders will allow for creating alternative credit ratings where the lender actually contacts credit references of the purchaser to confirm that the purchaser in the current transaction has a history of paying invoices as agreed.
On the subject order all relevant information must be presented clearly. These details will include who the purchaser is, who the seller is, when the purchaser will pay, how the product will be delivered, what is being purchased as well as any other conditions are required to consider the contract fulfilled.
Very important is the fact that Purchase Order Finance does not advance liquid funds to your company for you to pay expenses with, there will be no cash advances on purchase contracts. Should your business need funds in advance in order to pay the costs of doing the work of completing a sales contract you will need to look into other financing options as PO Finance will not meet your needs.
Manufacturing entities generally will not qualify for a PO Facility as these types of programs are generally suited towards facilitators of a transaction, not the manufacturer. What the financer is looking for in order to approve your PO Funding scenario would be for you, the Intermediary, to arrange for the manufacturing company to deliver the goods to the end buyer without you, the Intermediary, ever taking delivery or doing any work on the product being sold.
To clarify the concept, an example of a typical Purchase Order Finance transaction is follows.
After all negotiations, you have finalized the contract of sale and the buyer agrees to pay within 30 days of delivery. The problem lies in that the manufacturer requires payment prior to allowing the goods to leave their dock and you do not have sufficient cashflow to carry the payment until the buyer pays for the order so you have a gap of 6 weeks from time of shipment of the goods until the buyer pays, taking into consideration a 2 week delivery time.
In the example given, there is a gap of a month and a half from the time the payment must be made for the widgets until the buyer of the widgets actually pays for them. As long as all the boxes can be ticked for purchaser having an acceptable credit standing and the purchase contract being structured properly, this is a Purchase Order Finance transaction which can be funding with most PO Lenders.