When A Prospect Asks For Purchase Order Funding [For Brokers]
How many times have you spoken to a prospect that says they need purchase order funding? I hear it all the time. More often than not, they are asking for purchase order funding because they just got a big order.
Although PO funding can be a viable option, it can also be hard to obtain and is more expensive than other types of financing. They often ask for this type of financing because they have never heard of factoring. The concept of getting money before doing anything is appealing to all of us.
As a cash flow consultant, it is your job to educate the prospect on purchase order funding and see if it is an option for them. I always try first to see if factoring, which is also called accounts receivable financing or invoice factoring will help them instead.
Always ask your prospect if they are getting terms from their suppliers. If so, they can factor their invoices, pay the supplier, and avoid the need for PO funding.
If a company needs to buy raw materials from numerous suppliers and then manufacture the product, they need production financing. This is very risky to a lender since they could get stuck with raw materials or work in process. It is rare to obtain PO financing with this scenario.
A common need is for a distributor or wholesaler who needs to import finished goods to fill purchase orders. They usually need a letter of credit issued to their supplier. In this scenario, purchase order funding is a feasible option. The PO financer will require an inspection of goods before the supplier can cash in on the letter of credit.
P.O. funding requires the company to factor their receivables. The factoring company proceeds pays the PO financing in full and the balance goes to the client. Keep in mind that the company will incur PO financing fees and factoring fees and therefore must have at least 20% profit margins.