How You Can Use Purchase Order Finance to Impress Your Friends

Don’t get left behind in business…new funding options are the key to growth

This may come as a surprise to many SMEs, but there are products available that can fill some of the capital finance gaps they face.

Traditional instruments such as documentary credits and lines of credit are often only available to larger, established clients of banks. Most SMEs simply don’t meet the lending criteria of banks for these products.

Further to this, Letters of Credit are often too expensive and time consuming for SMEs. That’s if they can get them at all. Factoring (payment after shipping), bridging finance and warehouse receipts are a bit more user friendly, but also bring with them specific challenges.

A specific type of working capital financing that addresses some of the challenges above is Purchase Order (PO) Finance. In short, finance is provided to a business before goods are shipped in order for the business to prepare the order in the first place.

Payment before shipping provides finance to a business to buy raw materials, manufacture goods or buy trade goods for resale. Pretty funky, eh? Finance before shipment! Which means a business can take on new, more frequent or larger orders.

My friend Dave who works in margin lending for a major bank,(he won’t let me say which one), hadn’t heard about PO funding until last week. That was when I struck. There’s probably nothing more boring than one middle-aged man talking about money to another middle-aged man. Children sigh in resignation and leave the room. Liberated women start to attack piles of ironing. But us, we love it!

Dave: “So you lock –down one of the punter’s fixed assets, then give them the money?”

James: (Sits back with self satisfied grin, and considers masterful reply) “Nuh!”

Dave: “I’ve got it. (Smirking) You take on all their other receivables and fund it from them.”

James: “Good try.”

Dave: “Just tell me then, you smart *%$#!”

James: “All you need is a good buyer and a reliable manufacturer.”

Dave: “Too fiddly for us.”

James: Dave (In chorus) “Unless they were big.”

That just about says it all. Banks will do it, but only for the big end of town.

For SMEs it’s a good fit. PO is easier to qualify for than many types of financing since it is very short term and the collateral to secure the loan can be in the form of the purchase order itself .