Purchase order financing for companies involved in global trade is somewhat different from older, more traditional methods of funding. When receiving ongoing funding from a factor providing purchase order financing, a sales business transaction is supplied with equity to facilitate trade transactions and perform all necessary operational tasks and functions.
Collateral used for obtaining this working capital consists of the products, materials, and other components needed in order to successfully fill product orders and transact international sales. Business experience and repetitive transactions will be considered for purchase order financing approval by a factoring company like 1st Commercial Credit. This financing is based on firm product orders from reliable customers with solid credit records.
When deciding on the amount of funding to be granted in a purchase order financing agreement with a global trade company, a factoring company or asset-based lender will determine the value or advance rate of the eligible accounts receivable and purchase order advance. In some cases, a lender my participate with a P.O. finance lender that may be more familiar with the transaction.
Purchase order finance is actually determined by the value of "pre-sales" products and the credit worthiness of the purchasing customers. A very important deciding element for purchase order funding applications by companies is each company's gross margin. In addition, the products being financed needs to be easily sold and retain value if the purchase order in question is cancelled by the purchasing customer, it will be much easier to locate another purchaser if the borrowing company's gross margin and collateral worth are high. Also, if the purchase order product is a very specialized or unusual item, there is heightened risk because it may be difficult to find another buyer. Learn more on po funding parameters
What Types of Global Sales Transactions Benefit From Purchase Order Financing?
Purchase order financing arrangements are especially helpful to several major types of global sales enterprises, including:
Internationally Manufactured Product Sales – In global sales of finished products that are manufactured in other countries and delivered to buying customers, the entire order process is completed by an international supplier and logistics company. Payments from the P.O. Funder are released depending on the incoterms the buyer and seller have agreed to. All parties involved including the factor, po funder and logistics company work together in finalizing the process.
Sales of Finished Goods Assembled in Global Warehouses – In this sales business arrangement, product parts are manufactured domestically and then shipped to global warehouse locations for final assembly and delivery to customers. In this instance, risk is also shifted to the global assemblers and shippers. If the domestic parts manufacturer can show records of a successful history of working with these international product assemblers and handlers, the overall business risk will be reduced. This transaction is very limited and creates a challenging task in trying to collateralize inventory in other countries.
Sales of Finished Goods Produced and Handled Globally by One Company – When a domestic company expands to become a stand-alone international manufacturing and sales business, goods are both produced and handled overseas in facilities owned or leased and operated by this same company. When applying for purchase order financing from a factor, this company must show proof of its ability to carry out all aspects and logistics of production, sales, assembly, handling and delivery of finished goods. The company must also provide evidence of its ability to acquire and maintain funding from other sources to supplement amounts to be granted by the factor.
What Other Kinds of Global Production and Sales Utilize Purchase Order Financing?
There are additional kinds of international production and sales companies that make regular use of purchase order financing, such as:
Production Financing or Deal Users – In this type of merchandise production and sales, goods manufactured by the company are shipped for delivery directly to the customer. With the aid of purchase order financing, the company can cover the expense of all production materials, individual parts and labor required for order completion. However, the company is responsible for proving its capacity to produce goods and pay for any indirect expenses incurred.
Production Deal Makers with Outsourced Manufacturers– In this production and sales arrangement, all risk associated with the production process is transferred to the manufacturer under contract. It is in the best interest of the company applying for purchase order financing in this case to employ the services of a reputable, experienced outsourced contract manufacturer to assure successful business. Although this domestic manufacturer will most likely require either a monetary deposit or valid assurance of payment before accepting the contract, a manufacturer with a good reputation and production record will improve the applicant's efforts toward receiving ongoing purchase order financing from a factor.
Purchase order financing is currently increasing in use and value as a viable funding method for global trade companies of different types. Through this means of acquiring working capital, these global manufacturers and sellers operating in different venues and business structures can grow, thrive and gain assurance of continued success.
Purchase order financing is a funding solution that helps businesses fulfill large customer orders by providing the capital needed to pay suppliers for goods.
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