Vendor Guarantees - An Alternative to PO Financing

Although purchase order financing is usually much easier to obtain than conventional bank financing it's not as easy to get as factoring. Most po financing transactions carry more risk than factoring transactions so that qualification requirements tend to be more stringent. Also, since purchase order financing transactions are considered riskier, they carry a higher cost.

However, there is an often overlooked alternative called vendor guarantees. Many times, vendor guarantees can be used in place of po financing. And, these can easily be integrated into most invoice factoring programs and have similar pricing.

How do vendor guarantees work? This is easier if explained by an example. Let's first look at a conventional invoice factoring transaction:

1. You deliver the goods to your customer
2. You send the invoice to the factoring company
3. The factoring company advances you 80% of the invoice
4. You get the remainder 20%, less a fee, once the customer pays in full

In a vendor guaranty situation, the factoring company agrees to pay your supplier out of factoring proceeds before paying you. Your company, the factoring company and your vendor/supplier sign a three party agreement that allows the factoring company to pay your supplier before paying you.

A vendor guarantee can be used to get higher (or better) credit terms from your vendors because a financial intermediary is involved. The transaction would works as follows:

1. You deliver the goods to your customer
2. You send the invoice to the factoring company
3. The factoring company advances your vendor funds to cover their invoice (up to 80% of your invoice). Any difference is remitted to you.
4. You get the remainder 20%, less a fee, once the customer pays in full

Why would a vendor accept this type of arrangement? They would because they know that the payment is coming from the factoring company. However, and this is very important, the factoring company will only forward a payment to your vendor if you factor the invoice and only up to 80% of the invoice (this varies).

Many times, a vendor guarantee can be used instead of purchase order financing, making this solution something you should consider.

This short article is only a summary of how vendor guarantees work. One word of advice, be sure to use an attorney to help you understand them and their ramifications.

Disclaimer: This post is for information purposes only. Please consult an advisor if you require financial/legal advice.