Important Details about Purchase Order Finance Lenders

The general description of Purchase Order Finance is easy enough to understand. Let’s say you have a customer with a purchase order for $100,000 worth of items. The problem is that you don’t have the capital to pay suppliers for the materials needed to make those items. This is where purchase order finance lenders come in.

They verify the authenticity of the purchase order and check that the customer can pay for the merchandise. They investigate the capabilities of your supplier, and they check your capabilities as well.

If everything’s good, they then approve your request for purchase order financing. Your suppliers get paid, your customer gets their order, and you and the lender get the payment from the customer. The lender gets their cut, while you still enjoy a nice profit.

But the general description doesn’t’ touch on the specifics and some of the details are truly important. When you have your discussions with PO finance lenders, here are some details you need to find out:

  1. How do the lenders pay your suppliers? PO finance lenders don’t actually give you the money directly. Instead, they pay the suppliers on your behalf. This is usually done through letters of credit.

A letter of credit is a document issued by a bank, which guarantees a payment if specific conditions are met. For example, the supplier gets paid if they actually deliver $100,000 worth of items according to a specified delivery schedule. The letter of credit is given before the delivery, and once the delivery is done then the suppliers get their money.

This is a very safe method of payment for your lender, which is why when foreign suppliers are involved this is the payment method usually used.

But the problem is that some of your local suppliers may not be quite at ease with letters of credit. That’s because they can easily lead to complications, such as disagreements as to whether certain conditions are actually met. From the point of view of your supplier, they may send your supplies and they may not actually get their payment.

So ask your lender if they can also do wire transfers or even make cash payments. If they don’t, this can really limit the available suppliers you can use.

  1. What about prepayments? Many suppliers guard against not getting any money at all by requiring a deposit before they work on a given order. But some finance companies refuse to make a deposit. That means you need to ask if your lender can accommodate these requirements, should your suppliers ask for a deposit.
  2. Can they deal with guaranteed payment clauses? This is when your customer includes in your sales contract a guarantee that if they only sell X number of items, then they can return the unsold items to you and get a full refund for them (it’s considered a consignment).

You may negotiate better terms for these clauses, but it will help a lot if the PO finance lender has some experience with this kind of arrangement.

Working with purchase order finance lenders means you have to know all the details especially the ones we’ve mentioned above. They’re not as unimportant as you think.


Need Working Capital? Call us Toll free at 1-888-382-3766

The Importance of Experienced Purchase Order Finance Lenders

On the face of it, purchase order finance seems easy enough to understand. When you have a purchase order but you don’t have the money to fulfill that order, you go to purchase order finance lenders to provide you with the working capital you need. You then get the money to pay for supplies, you make or deliver the product to your customer, and both you and the lender get paid.

But it’s not actually that easy, and a lot of complications can crop up. After all, the lender has to deal with you as the borrower, pay the suppliers, and then collect the payment from the customer. And if foreign suppliers are involved, it gets even more complicated.

So what you really need is an experienced purchase order finance lender. So here are the things you need to find out about the experience of prospective PO finance lenders before you choose which lender to work with:

  1. Length of time in the business. This is an obvious question, but it’s crucial to ask nonetheless. There are too many new finance companies trying to help those who have been denied loans by banks, but some of them are still feeling their way around.

While these lenders are getting more experience, their education may come at your expense. They may in time figure out what to do when specific problems arise, but that may be too late to help you out.

  1. Focus on purchase order finance. Quite a few finance companies offer purchase order financing. But in reality, it’s not really their main focus. They actually specialize in factoring, and the PO financing is just a side business. They just offer it because it can lead to factoring deals.

Now these firms may work out when the PO financing is simple or small. But a lot of these PO financing deals can get complicated, and you need a specialist who knows what to do when complications come up. It doesn’t matter if a finance company has been in existence for the last ten years, when in reality they only do a couple of PO finance deals a year.

  1. Familiarity with your industry. Each industry has its own procedures and rules, so you need a lender who is already familiar with those rules. That’s why when you ask around for recommendations for a PO finance lender, you ask other people in your industry. It’s the same thing when you ask for references. You should find out if the lenders have references in your industry.

The lender is supposed to help you out with your financing. You need to focus on fulfilling that purchase order, and not have to waste time teaching your lender the ins and outs of your industry.

  1. Experience working with your particular customer. Your best bet is always a lender who has dealt with purchase orders from your customer before. Many of the bigger companies have complicated purchase agreement rules and regulations, and it will really help when your lender is already familiar with them.

Purchase order financing can be a maze filled with traps and dead ends. What you need is a lender who already knows the way so they can ensure you don’t get lost.

Need Working Capital? Call us Toll free at 1-888-382-3766