Lately, I have been getting calls from prospects that have a line of credit or business loan and want to add PO financing to their business financing mix. It seldom works.
The reason is simple. A purchase order financing company usually secures their position by filing a lien against the receivables (invoices) generated from the orders it finances. However, most financial institutions will also file a lien that encumbers the company's invoices when the company gets the small business loan.
Note that institutions do this for most business loans - even those that are used to buy an asset such as real estate. Perhaps, more surprising is that business owners find out about this when they talk to me and we do a record search. 9 out of 10 times they didn't even know that they institution was doing this. By the way - institutions seldom this behind their backs. It's all very clearly spelled out in their loan documents. (The lesson: always read and understand legal documents before you sign them)
Why does this eliminate the possibility of getting purchase order financing? For the simple reason that the purchase order financing company wants to have a first position security interest in the invoices that are generated by the orders they fund. Otherwise, if a client defaults the business loan, the institution could claim the proceeds from the invoices as collateral.
Some banks may be willing to subordinate their position and allow you to work with a po financing company, but this seldom happens, especially in these recessionary times.
Disclaimer: This article does not offer legal or financial advice. If you need it, get an adviser.
I also wrote about this subject as it relates to factoring.
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Looking for information on purchase order financing? Read the purchase order finance blog
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