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Purchase Order
Finance
For smaller
contract manufacturers and especially those producing products overseas,
purchase order
finance can provide the capital necessary to compete with virtually any
competitor regardless of size. With purchase order finance
in place, even the smallest manufacturers can effectively compete for
orders placed by the largest "big box" retailers.
As with factoring, the
size of your company or its credit history is of little concern to the
purchase order finance company. NOTE: Purchase order
finance almost always involves an order for goods and not services.
An order for services usually involves contract finance and is much
more difficult to obtain.
How Purchase
Order Finance Works
The most
common use of modern purchase order finance is to finance the
manufacture of goods for an exceptionally large domestic retail order.
A purchase order finance company will provide a bank guarantee or
letter
of credit (LC) to a manufacturer, oversee the actual production of goods, and
finally arrange for the shipment to be delivered to your customer.
Once the goods are delivered to the customer and invoiced, a factor
will
often pay-off and "take-out" the purchase order finance company
by financing the invoice.
To access purchase order finance, your order must be...
• of substantial size
• from a good, creditworthy customer
• produced by a qualified manufacturer that can meet the PO's
terms
Purchase order
finance companies seldom provide capital for the purchase of
raw materials (inventory for work in progress) to a manufacturer that
is the client in the transaction. That is usually the job of an
asset-based lender and inventory finance. In most cases,
they will only advance funds to a qualified "contract manufacturer"
(often overseas) who can draw down on a letter of credit from a
foreign bank to fulfill the order for goods.
Purchase order finance usually involves orders of
$50,000 or more. Fees for purchase order finance
are usually just slightly higher than that of factoring.
As mentioned, in most cases, the purchase order finance company
will be paid off by a factor once the goods have been
received and accepted "as ordered" by the customer.
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