Why Do Purchase Order Financing Applications Ask For So Much Information?

This is a common question that we get from prospects looking for purchase order financing -  Why do purchase order financing companies need to ask for all these documents before funding an opportunity? Some include:

1. Income statement
2. Balance Sheet
3. A/R Aging Report
4. Copies of the purchase order
5. Other information

Simple - because they want to be certain they don't lose their money. Although many people have the notion that a purchase order financing transaction is almost "risk free", this is not accurate. Actually, PO financing transactions can be quite risky for the company. This is why they ask for this information. The company wants to make sure that:

1. Your company has some track record selling this product successfully
2. Your company is in stable financial shape
3. That your customers and suppliers are solid
4. That your invoices are free of liens or encumbrances

This is where all the information that the purchase order financing requests comes in. They use it to determine the risk level of the transaction. 

Also, I'd like to mention a few things that can go wrong with a purchase order funding transaction - if only to prove they are not risk free:

1. Your supplier can deliver faulty goods and not correct the problem (supplier risk)
2. You could deliver the product and have a customer that refuses to pay (credit risk)
3. Your goods could meet the specifications but the client could still claim the goods are not satisfactory (disputes)
4. There could be a mismatch between your customer requirements and the requirements that you gave your supplier (operational risk)
5. The transaction could go well but a previous lien holder (i.e. tax lien holder, judgement lien holder) that has a higher position lien than the po financing company (asset security risk)
6. And more!

All of these could go wrong and you would have a situation where the purchase order financing has already paid for the goods, but with a minimal chance that the transaction will conclude sucesfully. This is also why purchase order financing rates are higher than factoring rates - the risk is higher.