The Purchaser Order Financing Value Proposition

Imagine this situation. You have a company that supplies widgets to other businesses. This imaginary company buys widgets from its suppliers and repackages them and re-sells them to the other businesses for a mark up. This is a very common scenario.

Now, lets assume that this company is doing extremely well. As a matter of fact, it is doing so well that it is selling widgets as fast as it can buy them... Now, like most companies that sell to other companies, the business has to offer net 30 day terms. This means that sooner or later growth will hit a wall, because it will eventually run out of cash. Oh, from a P&L the business will be doing great since it is invoicing a lot. It just wont have any money in that bank, that is all. It will all be tied in sold product that has been invoiced but not paid.

Here is were purchase order financing (or also known as purchase order funding or po funding) can help.

With a PO funding agreement in place, the business could grow, as fast as it could sell widgets. There would be no wall.... Lets consider the new scenario.

1. The business buy widgets from it's manufacturers using a PO from a client.
2. The purchase order financing company funds the purchase through an payment instrument (e.g. LOC)
3. The sale is made and product is delivered.
4. Most of the times, the sale is made without using any of the clients cash
5. Once the customer pays for the widgets, the transaction is settled.

Can you see how this would enable a business to grow?

Usually, purchase order financing is used in combination with invoice factoring. I will explain why this is the case in a later post. But combining po funding with factoring allows the client to minimize costs.

Have a great new year!