Why a Purchase Order Financing Company will NOT pay your Suppliers in Cash

One common request we get from purchase order finance clients is to pay their suppliers in cash, rather than by letter of credit. While po financing companies can pay suppliers in cash (or wire) after the goods have been shipped and inspected, most will not prepay for the goods in cash.

Why? Simple, an advance cash payment to a supplier is the equivalent of giving them an unsecured loan.

Let me give you an example. Let's say that ABC Importers if buying widgets from a supplier in another country. Let's say that the supplier is demanding either a deposit or a full payment of the goods paid by wire (TT) prior to the start of manufacturing. There are usually two reasons why they may be making this request:

a) They don't trust you
b) They need the money to be able to fulfill their order

If their issue is a), lack of trust, then that can easily be solved with a properly executed letter of credit. In my experience, the reason most suppliers ask for cash is because they really need it.  If you (or the purchase order financing company) pays them, you are giving them an unsecured loan (or use of your cash). Now, what happens if they default in your order, provide unacceptable product or just go bankrupt? How do you get your cash back?... The short answer is that you don't.

As a rule of thumb:

a) Most po financing companies will not prepay your foreign suppliers by wire (in cash)
b) Some po financing companies may do a "cash against shipping docs" arrangement for foreign deals
c) Some po financing companies MAY prepay your US suppliers if they are large and credit worthy (think Dell or GE).

Some companies just don't like dealing with letters of credit, mostly because they require some additional work on part of the parties that want to do the transaction. In our view, the extra work is well worth the protection that a properly worded letter of credit (usually in conjunction with an inspection of goods clause), can provide you.

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Looking for information on purchase order financing? Read the purchase order finance blog