How Does Purchase Order Funding Work? – Work In Process
Many people ask how we finance Work in Process Purchase Order Funding transactions. While there is no single correct answer since no two work in process purchase order funding transactions are the same, we have compiled a step by step guide on how we finance a typical transaction.
There are two main types of purchase order funding including Work In Process and Finished Goods. Purchase Order Funding for finished goods involves the purchase of goods for resale that don’t require any type of assembly or manipulation prior to reselling them. Purchase Order Funding a Work In Process involves the purchase or components or raw materials that will be assembled prior to resale to the end customer.
Work In process Purchase Order Funding will always be more complex than your typical buy/sell transaction, and chances are there will also be greater risk. Standard costs of Work In Process Purchase Order Funding will also be greater than when financing finished products for resale. That being said Work In Process may not require funding of 100% of raw materials and components therefore making the cost in relation to the resulting invoice significantly less than funding 100% of the cost of finished products.
- Client(Borrower) obtains a confirmed purchase order from a credit approved customer.
- STAR evaluates the structure of the proposed transaction to confirm lead times of components and raw materials are appropriate for delivery projected delivery dates and profit margins are significant enough to cover costs.
- The client places a purchase order with his manufacturer/supplier (foreign or domestic).
- When satisfied with the transaction’s structure, STAR opens a letter of credit to the supplier or arranges other form of payment.
- Just before the goods are ready to be shipped, STAR will send in an independent 3rd party inspection company to make sure the products ready to be shipped are what was ordered in the right quantities, quality and in the right time frame.
- Generally the manufacturer/supplier presents documents against the letter of credit through his bank.
- Assuming the documents are in order, STAR will pay for the documents.
- The products arrive for assembly or final preparation at client’s facility or place of manufacture/assembly.
- Products are finished and prepared to be shipped to customer.
- STAR may request a final inspection to confirm products are completed and shipped as ordered.
- The products are then drop-shipped or shipped to the customer or shipped to a warehouse where they are unpacked and staged for shipment to the final customer.
- When the merchandise is shipped to the customers, the receivable is assigned to STAR. Ultimately, the customers will pay STAR, who will take what is owed to it and pass the balance of the funds to the client. Sometimes there is a senior lender or factor involved. In those cases, the senior lender or factor will make advances against the receivables direct to STAR sufficient to repay its advances and fees.
With STAR Funding’s manufacturing and logistics experience you are receiving years of knowledge and know-how to help make sure your transactions go as planned. Your customer and vendor relationships can be your most valuable assets; don’t let an inexperienced finance partner interfere with your business. Contact STAR Funding today to speak with a representative about how to finance your future transactions.