Modern Purchase Order Finance and Production Funding
- Purchase Order finance has continuously evolved to meet customer needs.
- Today’s PO finance is performance risk financing, not traditional asset-based lending.
- Funding for the production should be matched from the order into the conversion of sale to final payment.
- PO finance is more of an art than a science that works in tandem with invoice factoring companies.
- Companies can achieve their full potential with the help of PO finance solutions.
|Modern Purchase Order Finance|
The term purchase order finance is well known to many people however, many still do not understand the depth and value of PO finance solutions. PO finance has continually progressed to meet the individual customer needs in this ever-changing business world.
Even though purchase order finance has grown a lot in the past few decades, many traditional lenders and financiers still view it through the lens of the past. PO finance is not only completed goods finance anymore. It is not asset-based or balance sheet based financing.
An example of a traditional PO finance would be in a situation where a client of a factor or invoice financier establishes a new customer and wants funding to fulfill the end customer’s order. However, the available funds to fulfill orders are determined on the present asset-based formula and the client definitely needs the funding in excess of what its current balance sheet will allow. Modern PO finance eliminates this deficiency and helps clients grow their business by fulfilling larger orders.
Today’s purchase order finance has evolved a lot from traditional asset-based lending to performance risk financing. Good companies that do not have a strong balance sheet are now able to fulfill orders to creditworthy end customers with the help of the modern PO funders.
Now, even the pre-revenue start-ups without any assets or balance sheet are able to enjoy the funding provided directly to suppliers/manufacturers. Funding depends on the creditworthiness of the customer, the strength of the manufacturer’s operation, and the supply chain conversion cycle.
The process of transforming finished components into the final product that can be used by the end consumer is production. For instance: In an automobile assembly line, various finished components such as the engine, hood, wheels, seats, etc. are assembled to create a final complete automobile that can be used as a final product by the consumer.
Business owners might want to pledge their personal properties for acquiring funding. However, according to Leigh from Stak, “Funding for the production should be matched from the order into the conversion of sale to final payment.” This is achieved through a method known as production funding.
To fund the production, a credit limit is provided to the client and the advance is made directly to the supplier. Each drawdown is allowed up to 90 days with a further 90 days once the final product is sold and the receivables created. Once the customer pays for the invoice (usually within 90 days), funds are used to pay the initial drawdown and the profits are returned to the business/client. This cycle of 180 days is usually a good fit for both the financier and the client.
|PO finance is an art and it helps clients grow their business.|
Many people have a false belief that a purchase order cannot be canceled. This is far from the truth. POs can be canceled at any time due to many reasons such as customer-vendor agreements, disputes between the parties, and so on. One canceled delivery can cause a lender to lose a significant amount of capital invested. Therefore, it is very important for the PO financier to structure and monitor the deals properly from the very beginning. Therefore, PO finance is more of an art than a science.
In order for the transaction to run smoothly, the PO funder monitors the quality of the inventory by assigning a reputable third-party independent inspector to inspect the goods and generate a pre-shipment inspection and a loading inspection report, which are then matched with the official purchase order. The client/business owner is relieved from stress since the PO financier makes sure that the goods match as per the customer order. Once the goods match exactly in terms of quality and quantity, they are then ready to be shipped for delivery. The responsibility of the PO funder does not end here. The PO funder also oversees the shipping, logistics, and delivery of the goods until the purchase orders are successfully fulfilled and the receivables created. Once the sales are invoiced, the invoice financier or factor advances to the PO funder. The invoice is then usually collected within 90 days from the date of invoice or if the client has an existing factoring relationship, the factor pays off the PO funder’s cost by advancing funds against those receivables.
AR Cash Flow is an expert in PO finance and production funding and it has been providing PO finance solutions to its clients since 2003.
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