Purchase Order Finance

The days of easy credit are gone and we probably won't see them again for a number of years. Markets have tightened across the board, banks are hoarding cash, and you are unable to finance orders you have on hand (or could have on hand). If you could only find a way to get your suppliers to release goods, you would be able to pay them because you know your customers are good for the money.

Sound like something you've experienced?

Well, my friend, you are not alone. Many business owners find themselves in similar situations: They have the opportunity to take on a potentially valuable order, but do not have the means to pay their suppliers due to cash flow issues, maxed out credit lines, or a lack of terms with their supplier.

There are usually a couple of reasons a business needs this kind of financing. Large orders, seasonal sales and business expansion are most common. Sometimes a company may have funds available to finance an order, but has opportunity elsewhere and just needs to find additional sources of funding.

Fortunately, there is a way to make this work without having to fork over 100% of the cost of goods to your supplier. It's called purchase order (PO) finance, and there are a couple of ways it can be done.

• Making Direct Payments to your Supplier

A PO funding company can advance up to 100% of the confirmed purchase cost to your supplier by paying them directly and taking ownership of the goods. The funding company then collects the invoice payment from your customer and pays you the balance between the order value and the amount paid to your supplier, minus fees, once payment has been received.

• Issuing a Letter of Credit

This is a commitment to pay the supplier on their fulfillment of certain conditions backed by either a Bank or the PO funding company. The conditions are normally related to the provision of correct documentation. These Letters of Credit are governed by the regulations of the International Chamber of Commerce. Terms are negotiated directly between your supplier and the funding company, and the Letter may be opened prior to production or just prior to shipping, whichever works better for the transaction. Funds are typically released once the goods are delivered to the buyer, but may be released "against docs" while in transit.

• Supplier Guarantee

This is a commitment to pay the supplier by the funding company from the availability (funds) generated on the funding of the receivable created once you invoice on delivery of the goods related to the purchase transaction.

As you can see, there are a couple of ways to keep your business moving even if you don't have the ability to fund these opportunities yourself.