How Does Purchase Order Funding Work? – Finished Goods
Purchase Order Funding is a great tool that allows undercapitalized businesses to take on larger orders and compete in today’s economy. I’d say about 30% of the people we speak with misunderstand how Purchase Order Funding works. While there are some complex transactions, most are pretty straightforward. There are some variations to purchase order funding transactions but the easiest way to explain it is the following:
Purchase order funding is when a lender finances the purchase of pre-sold goods for resale to your customer.
Depending on the payment terms with vendors, delivery terms, and lead times the structure of the transaction can vary. A good Purchase Order Funding company will help you structure the transaction in a way that’s most cost effective for the client and protects all parties involved.
There are two main types of purchase order funding including Work In Process and Finished Goods. Purchase Order Funding for finished goods (most common) 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 of components or raw materials that will be assembled prior to resale to the end customer.
- Company receives a confirmed purchase order from a credit-approved customer. Some orders will call for open payment terms while others will require a letter of credit to accompany the order to the manufacturer.
- Company then issues a purchase order to his manufacturer or vendor.
- STAR will then evaluate the terms of the transaction.
- When satisfied with the transaction’s structure, STAR opens a letter of credit to the supplier or confirms payment upon vendor’s performance as stated in the purchase order or agreement.
- STAR will arrange 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.
- If a letter of credit is used 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.
- Products are then shipped to the company. STAR is able to pay duties and freight if necessary.
- The products may be drop-shipped to the customer or shipped to a warehouse where they are unpacked and staged for shipment to the 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.
Now that you have a better understanding of how a typical Purchase Order Funding transaction works, do you have any questions? Feel free to contact STAR Funding today with any questions you may have. Whether you are a new company or a seasoned corporation we are always looking for great entrepreneurs and companies to work with and help finance their growth.