Purchase Order Finance is short term funding used to finance the purchase or manufacture of specific goods that have been presold by the client to its credit worthy end customer. Funding entails issuing letters of credit or providing funds that allow clients to secure the inventory they need to fulfill customers orders.
What is Purchase Order Finance?
Purchase order Funding can be used by Manufacturers, Importers, Exporters, or Distributors for:
- Issuing Letters of credit
- Payment to third party suppliers for finished goods
- Raw materials
- Direct labor
- Shipping, packaging, inspections, etc.
Primary Reasons why Purchase Order is Utilized in Financing Transactions
- Insufficient Capital
Company has solid export / import or domestic sales but does not have the working capital to complete the transaction or continue to grow.
- International Expertise Company doesn’t have the expertise and experience to structure and complete the import or export properly. Even established international clients will use our expertise to make a transaction safer.
- Transfer of Foreign Risk
Clients and/or clients’ vendor (on exports) transfer to the funding source the risk of payment by the foreign buyer.
- Alternative Financing Versus Giving Away Equity in a Fast Growing Company
The funding source provides working capital where banks can not because the company’s balance sheet or collateral will not support sufficient borrowing. An equity placement would force the owners to give away a high percentage of the company.
Often clients need a quick response in order to get or keep a sale. The funding source can quickly do its due diligence and review the facts of the transaction. There are no committees, lawyers or other elements that slow the decision process down.
- Enhance Profits
Clients can grow more quickly by having the capital available to do more business. Clients brokering goods can become principals thus increasing their margins. Our clients can expand their margins, save on various costs and increase supplier credit extended to them.
- Disguise our Client’s Identity
Our clients that are middlemen need transactions secured in such a way that the end buyer and manufacturer do not become acquainted. In these situations the end buyer typically issues a letter of credit to our client, and we issue a letter of credit to the manufacturer.
- Operational Support
If desired, the funding source can, to a great extent, become the international operations area for a company, thereby allowing a cost savings and providing expertise to international transactions.