How To Accrue Profit With Purchase Order Finance

 In Daily Column, Purchase Order Finance

PO Funding, is it a Voodoo financing option?

PO Funding, is it a Voodoo financing option?

Lack of affordable capital. The curse of small business. It stifles start-ups. Established enterprises struggle to expand without it.

Banks will go above and beyond for larger enterprises where alternate forms of funding are de rigueur. Like a restaurant changing its menu for a celebrity diner. But for SMEs… it’s still meat and two veg.

But, maybe not. Purchase Order (PO) Finance is easier to qualify for than many other types of financing because it is very short term and the collateral to secure the loan can be in the form of the purchase order itself.

Surprisingly, many finance professionals working in Australia consider it to be ‘Voo Doo’ and are therefore loath to recommend it to clients.

I don’t really get this. The precedent has been set. Brokers in the UK, Europe and US, regularly recommend PO funding to clients. The margins may be a bit thinner, but profits can be set aside to either partially or fully fund future ventures. Tap on. Tap off.

I must concede it hasn’t been given much press in Australia. Which is a pity because it’s such a simple premise. Here’s how it works at AR:

– An SME receives a purchase order from a customer

– We then verify with the customer the validity of the purchase order

– We open a Letter of Credit to the SMEs supplier

– A supplier then ships the completed goods to the SMEs customer

– The customer then pays us for the goods

– We then pay the SME the profit

PO Finance helps SMEs to fulfill orders and accrue profits and revenues that would not be possible with standard financing. (If there’s another way that’s this easy, please contact me about it.)

This gets the ball rolling. Profits increase. Turnaround times are reduced. More customers come onboard.

All this without large increases in fixed costs. How? I hear you say. The international experience is that PO Finance helps SMEs to increase their utilization of existing production capacity.

Which doesn’t mean SMEs can become celeb diners and change the menu, but they can at least get some pretty fancy takeaway.

“Fries with that sir?”

“No thanks, I’ll have caviar. Cheers!”

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