What Makes Successful Purchase Order Financing Transactions

Learn how to prepare your business for purchase order financing and get tips on what purchase order financing lenders look for.

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We have been getting many inquiries in regards to po financing, especially a large demand of buyers wanting mask and medical supplies and other related supplies that involve overseas suppliers.

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Unfortunately these type of transactions rarely mature due to the risk involved in the complete transaction flow and all the moving parts that have to fall into place to make a successful transaction happen while diminishing risk for the lender.

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In summary, my experience in funding purchase orders from finished goods, light assembly and production finance. The following type of transaction is usually a recipe for disaster:

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"It always seems that when you have an item ordered for the first time by a buyer, ordering from a supplier they have never dealt with, that's ordering overseas from a manufacturer or consolidator they never bought from, requiring upfront cash to procure or produce the items finishes up as a disaster."

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The most successful purchase order finance deals involves a buyer that has recurring business with a vendor (Our Client), a good transaction history for at least 4 yo 6 months minimum and the vendor has financially strong suppliers in the back end supporting the supply chain. We fund purchase orders every week and these seem to be the most successful transactions.

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There should be no reason to send money to a supplier if the items are not ready to ship. Many things can go wrong and almost every lender I know will not send money with these payment terms.

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I wrote this small article so you can learn what I usually look for in a purchase order transaction and these should be the questions to ask the client needing po finance.

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What Makes Up a Viable Purchase Order Financing Transaction?

PO Funding involves a credit worthy buyer that will acknowledge the notice of assignment to lender/factor issuing a purchase order to a viable vendor that shall provide the items or services described in detail and a price that will be paid upon delivery that meets the terms and conditions of the Purchase Order.

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If you are a supplier or a financial consultant looking for Purchase Order Funding, you should consider and analyze if the deal will qualify for purchase order financing based on the basic requirements of the transaction mentioned above. I suggest you study the questions below because every lender you approach will ask these questions at some point.

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Preparing for a purchase order funding application

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What Is the Description of the Transaction and Concerns From a Lender?

• What is the item description and expiration due date of the po?
• What are the payment terms of the sale?
• Are the items overseas? How much will the tariffs and logistics cost?
• Will the client/applicant be able to deliver on time?
• Who is the buyer and how much credit do they qualify for?
• Is this a recurring purchase order with multiple future orders or just a one time shot.
• How many times has this buyer previously purchased the item(s)?
• Is this a private label product that requires licensing to sell in the event of liquidation?
• Is this a finished goods transaction, requires light assembly or 100% production finance?
• Who is the supplier of our client/applicant?
• Has the applicant bought from the supplier in the past?
• Does the applicant have a credit line with the supplier? If yes how much is owed, how much is current and how much is the credit line for?
• Is the supplier domestic or foreign? Does the supplier need cash upfront? How much? Can the applicant afford the upfront deposit?
• Will the supplier accept a Letter of Credit? What are the payment terms? When will the transfer of title happen? What are the incoterms?
• Will there be an onsite certified and bonded inspection of the items being loaded before payment is issued to supplier?

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Most Lenders Prefer That The Supplier Already Have a Relationship With the Customer. Why?

• Some buyers will not work with a third party lender, factoring company or notice of payment assignments.
• If it's a new item, the buyer has to see and feel the product before ordering it, or will have specifications the items must meet. The buyer will always scrutinize the first arrival of products and can be rejected if it doesn't meet the requirements or quality they expected.
• Are there any pending chargebacks that will short pay the invoice?
• What is the credit quality of the buyer? Has it been pre-approved with an assigned credit limit? will there be credit insurance required?
• Is the buyer a municipality, state agency or federal government agency? These three type of buyers require supplier criteria for accepting bids or payments.

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The Client/Applicant

• What does the business do?
• How long have they been selling these items?
• Do they have a line of credit at the bank?
• How much cash do they have on hand and how much will the client participate with in the transaction?
• Will the items arrive on client's site for repackaging? Is the building and inventory insured and for how much?
• Is the client current on rent? Will the landlord sign a waiver?
• Does the po finance require production finance or light assembly?

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These are just a few questions I ask my clients but the 1st step is to get the client to apply for invoice factoring, sometimes that alone will cover the cash flow needed to continue the supply chain cash flowing.

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1st Commercial Credit provides purchase order funding for clients that are already factoring receivables for at least 90 days before consider finished goods po funding. We require at least 1 year before releasing funds for production po finance.

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Raul Esqueda, President

1st Commercial Credit