Since the pandemic started I’ve been getting calls to finance huge Purchase Orders (PO’s) for PPE’s. They want us to take on a huge financial risk, so they earn big profits. I always explain the facts and outline what it takes and that is when the conversation usually ends.
Purchase Order Financing does exist, but it is risky and complicated so that is why it’s only offered to bigger and better businesses with a proven track record of successful transactions. Rapidly growing businesses that are newer and smaller or turning themselves around will have a hard time getting qualified. But if there is the will then there is a way and there are solutions.
Business finance professionals like ourselves should look at a request for PO Financing as a cry for help. We need to help them to understand the challenge they are facing and introduce them to the available tools. If the business owners are willing to do what it takes and the transaction makes sense, then there should be a way to get it done.
Supplier credit and Factoring are two keys to a successful PO Financing Solution. Suppliers are eager to make a sale, but they worry about being paid. They have a lot less to worry about when a Factor is involved in the transaction. When a Supplier is presented with Irrevocable Instructions to be paid directly by the Factor they are more likely to cooperate.
Additionally, if the PO can be renegotiated to smaller and more frequent deliveries then the initial exposure is far less and the first factored invoices can be used to pay for the next ones. This allows time for a stronger relationship to develop. The business can also Factor existing Accounts Receivable and use that cash to help fund a new PO.
Receiving a PO is not the hard part, filling it according to the terms and conditions and then making enough money to compensate for the time and risk involved is the real challenge. As well, Factoring does not eliminate all the risk and business owners need to be prepared to share in that. But if there is money to be made and all parties are working together then a good Factor can provide an excellent Purchase Order Financing Solution.