Why We Can't Finance Your Supplier

Every so often, we speak to customers that need purchase order financing because their supplier is unable to give them terms. Notice that I didn't say unwilling - I said unable. Usually the supplier has had some cash flow problems of their own and are asking for full payment before being able to produce the goods. They ask  for the advance payment because they need it to pay for their own raw materials and labor. IN effect, they are asking their client to finance them.

Unfortunately, if a client of ours was buying from the above mentioned supplier, we would not be able to finance the order. And personally, I don't think that any business financing company that offers PO financing would be able to fund this order either.

Why? For one simple reason. Purchase order financing is a tool that wholesalers can use to guarantee a payment to their suppliers who are not willing to give them payment terms. However, it is not a tool that is used to finance your suppliers that have cash flow problems. Think about it this way, if a purchase order financing company prepaid that supplier so that they could manufacture the goods, it would be as if they were giving them an unsecured loan. Why would a purchase order financing company do that? PO financing companies are in the business of financing their clients - not their client's suppliers. If the supplier needs business financing - they should look for it themselves!

Most purchase order financing companies protect themselves (and their clients) and minimize supplier problems by insisting to pay suppliers by letter of credit or a similar instrument. This protects all parties in the transaction. However, if your supplier has cash flow problems, it's unlikely that they will accept this type of an agreement.