How does Purchase Order Financing Work?
Wholesale companies and manufactures all buy and sell on varying terms. Whether you are waiting 60 days to get paid or dishing out a 30% cash deposit, there is a cash flow gap that needs to be covered. Businesses looking for a flexible solution to funding purchase orders choose a lender like Star Funding who specializes in Purchase Order Finance and Trade Financing to help them.
When evaluating a Purchase Order Financing transaction STAR looks at the buy(who you are buying from) and the sell(who you are selling to) to determine the most cost effective method in financing the transaction. If necessary, we can help you arrange terms with vendors that fit the proper PO Funding criteria.
The 3 most popular methods of Purchase Order Financing:
Letters Of Credit – STAR Funding drafts and issues only the most secure Letters Of Credit using top international banks. Our banking relationships allow us to deliver financing tools that are widely respected all over the world. (Learn more about Letters of Credit and the UCP 600 governing law HERE)
Cash For Finished Goods – Certain lenders prefer only working with secure bank financing instruments. STAR Funding prefers to keep purchase order financing transactions simple and cost effective. Often times we will simply pay cash for goods to assist our clients with their purchases.
Supplier Credit – In certain circumstances a traditional purchase order financing arrangement cannot work. Either a senior lender isn’t interested in setting up an intercreditor agreement or perhaps the end customer has to be kept confidential. In these cases STAR Funding will simply finance inventory for the client. This inventory can be used for internal consumption or resale.
Ok, so what happens next in a PO Funding transaction?
Once the products are delivered to your end customer, you send an invoice to request payment. Your accounts receivable factor or asset based loan provider will finance the resulting AR(from submitting an assignment schedule or borrowing base certificate) and pay back Star Funding with the first advance.
Star Funding is known as one of the few purchase order financing companies that will also handle the factoring portion of the transaction. Keeping the factoring and PO Funding under one roof helps you avoid negotiating lengthy intercreditor agreements.
Why do you need to Factor when Purchase Order Financing?
That’s a great question. The factoring relationship at the tail end of the transaction provides a backstop to make sure the PO Funding Company gets their money back. Since you are required to assign your AR, the intercreditor agreement directs the factor/lender to pay back the PO Funding company with the first advance.
There are special circumstances where a factoring relationship may not be necessary. These situations include certain trade finance transactions, COD and sometimes credit card payments.
What are the Benefits of Purchase Order Financing?
- Take on more business and stop turning down large purchase orders.
- Purchase more inventory.
- Improve your cash flow and working capital.
- Protect your company against the credit risk of your customers.(Learn about non-recourse factoring)
- Utilize bank financing instruments to control your buying risks from both domestic and international customers.
Are you ready to start financing your purchase orders? Contact Star Funding today and speak with a specialist to better understand how Purchase Order Financing can help you grow your business.