Purchase Order Funding FAQ

  1. What is purchase order financing?
  2. What types of purchase orders do you fund?
  3. What transactions do not qualify for purchase order financing?
  4. When should purchase order funding be used?
  5. What minimum gross profit margin should the purchase order have?
  6. What types of companies should use purchase order funding?
  7. Can a manufacturer use purchase order funding if they do not have experience in manufacturing the product?
  8. Is a personal guarantee required to obtain purchase order financing?
  9. How important are the financials of my company and its principals in obtaining purchase order financing?
  10. My bank already has a lien on all my receivables. Can purchase order funding be gotten in this situation?
  11. What transaction size can be considered for purchase order funding?
  12. How much will the funder advance on the purchase order?
  13. How is the purchase order funding advance paid back?
  14. What documents will the funder need to see as part of the application for purchase order funding?
What is purchase order financing?

Purchase order financing (a.k.a. purchase order funding, PO financing, and PO funding) allows your company to purchase goods from your supplier or fund manufacturing of product to complete an order to your company from a creditworthy customer when you lack the working capital to do so on your own. The order may be for finished goods that you acquire from a domestic or foreign supplier, and then deliver to your customer. The order can also be for goods that require some amount of manufacturing or repackaging before being delivered to your customer. By being able to complete the order you maintain the relationship with your customer and have the opportunity to receive future orders (and profits) from that customer.

 

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What types of purchase orders do you fund?

There are 3 types of purchase orders. They are listed in increasing degree of difficulty for obtaining purchase order funding. For the last two the financial strength of your company and experience of your company in doing the manufacturing or repackaging are very important. For the last two, your company cannot have negative equity.

  • Purchase orders for goods that are purchased from an independent third-party supplier in a finished state (you are probably a distributor, wholesaler, product designer, or importer that simply ships the product to your customer without any manufacturing or repackaging by your company)
  • Purchase orders for goods on which your company performs light manufacturing or repackaging (e.g. Importing of electronic components that are tested and then repackaged before delivery to the customer)
  • Purchase orders of component parts on which total in-house manufacturing is done to produce the product being purchased by the customer

 

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What transactions do not qualify for purchase order financing?

Purchase order financing cannot be used in the following circumstances:

  • Services (only goods qualify for purchase order funding) (e.g. Custom or semi-custom software does not qualify for purchase order financing)
  • Goods that will become part of a building or real estate
  • Goods delivered on consignment (your customer cannot have the option of returning any unsold goods)
  • Goods with no specific delivery date (purchase order financing is not inventory financing)
  • Goods that require long production cycles (e.g., 90 to 120 days) because the cost of the purchase order financing will become too great
  • Goods being manufactured by companies with little or no experience in manufacturing that type of product
  • The customer is not creditworthy (your customer must have a good history of paying their bills)

 

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When should purchase order funding be used?

Purchase order funding should be used only when most other forms of financing have been exhausted. For example, the following options have been considered but cannot be used for reasons shown.

  • Credit lines cannot be expanded
  • Real estate, inventory, and equipment cannot be borrowed against
  • Receivables cannot be sold.

 

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What minimum gross profit margin should the purchase order have?

A minimum gross profit margin of 30 percent on transactions in which purchase order funding is being considered. It may be possible to do purchase order financing on lower margin transactions, but a contribution from your company may also be required to complete the transaction. You should determine if the transaction will still be profitable after paying the purchase order and accounts receivable financing fees involved in purchase order financing.

 

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What types of companies should use purchase order funding?

The following types of companies that are selling to a creditworthy customer can use purchase order funding.

  • Distributors
  • Wholesalers
  • Product designers using third party manufacturers
  • Manufacturers having strong financials and with experience in the type of product for which the purchase order funding is being requested

 

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Can a manufacturer use purchase order funding if they do not have experience in manufacturing the product?

Maybe. It may be possible for a manufacturer to obtain purchase order funding if they subcontract the manufacturing of the product to a company with experience in manufacturing that type of product.

 

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Is a personal guarantee required to obtain purchase order financing?

Yes. A personal guarantee is always required to obtain purchase order financing. Some underwriters will request a personal financial statement to determine if the personal guarantee could be fulfilled if necessary.

 

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How important are the financials of my company and its principals in obtaining purchase order financing?

The importance of the financials of the company and its principals increases as the risk of satisfying the purchase order increases. For example, your company cannot be in danger of becoming insolvent during the term of the purchase order. The amount and complexity of the manufacturing required to deliver the product increases the risk that the purchase order will not be satisfied. Therefore, the financial strength of the company and its principals together with experience of the company in satisfying similar purchase orders becomes more important when deciding to approve a purchase order financing request.

 

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My bank already has a lien on all my receivables. Can purchase order funding be gotten in this situation?

Maybe. It will be necessary to obtain a subordination agreement with your bank on that portion of the receivables generated as a result of the purchase order funding transaction.

 

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What transaction size can be considered for purchase order funding?

Depending on the funding source, the range for standalone purchase order transactions is about $100,000 to $2,000,000. The minimum for recurring purchase order transactions is about $50,000 per month.

 

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How much will the funder advance on the purchase order?

The amount that will be advanced on the purchase order will be the minimum required to get the order to the point where an invoice can be issued. For example, for finished goods, the advance would be the amount required to buy the goods from your supplier and might also include the cost of freight, insurance, and inspections. Depending on the specifics of the transaction, some funders may request that your company contribute funds to acquiring the products from your suppliers

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How is the purchase order funding advance paid back?

The purchase order funding advance may be paid back in the following ways.

  • Proceeds from a letter of credit to your company from your customer stating payment will be made when goods are delivered
  • Accounts receivable financing of the invoice that is presented when the goods are delivered to your customer
  • Purchase by a leasing company when the goods are delivered to your customer

 

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What documents will the funder need to see as part of the application for purchase order funding?

The following documents will need to be provided along with a completed application form.

  • Copies of Articles of Incorporation and By Laws
  • Copy of Fictitious Name Filing (if applicable)
  • Copy of Partnership Agreement (if applicable)
  • Financial statements
  • Schedule of aged accounts receivable
  • Copy of 941 withholding tax filings & proof of payment

 

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