One Stop PO Funding & Accounts Receivables Funding
A Well-Established Process of PO Funding & Invoice Factoring:
- A transaction starts with a “Purchase Order,” an electronic or paper document issued by the Buyer detailing the amount and specifications of goods it is prepared to purchase.
- The Seller accepts the purchase order and completes work on the requested goods
- Upon delivery of the order, the Seller sends an invoice to the Buyer detailing the amount owed and requested payment terms
- Payment is made, completing the transaction
Financing is available throughout the transaction cycle. Through Purchase Order Finance (“PO Funding”) a commercial finance company helps Sellers source supplies and materials necessary to fulfill an order. Later, once a shipment is complete, commercial finance companies provide funding against invoices (“Invoice Financing” or “Invoice Factoring”). Use this capital for payroll, further purchases, enterprise expansion, or to meet any other general business need. Rather than look “piecemeal” for funding solutions, businesses can benefit greatly by using a “one-stop” approach to financing throughout the transaction cycle.
Benefits to Combining Purchase Order Funding and Invoice Factoring with One Lender:
- Harmonizes financing available throughout the production cycle
- Ensures capital doesn’t become idle or “trapped” moving from one lender to repay another
- Ease of administration
- Consistent, consolidated lender reporting
- Helps build a relationship between business and lender
How Purchase Order Financing Works:
- Companies can receive up to 100% financing for the fulfillment of customer orders
- Lenders adjudicate an opportunity based on specific key considerations: (a) financial strength of the customer placing the order, (b) the gross margin embedded in the proposed transaction (generally required to be at least 15%), (c) the strength of any relationship that may exist between the business and the customer, and (d) ease of doing business with the supplier
- Funds can only be for purposes of sourcing the order
- The purchase order lender pays the supplier directly
- Shipment of goods is generally direct from the supplier to the end customer
- Direct payment to the lender by the end customer
Invoice Financing or Factoring:
- Businesses can receive 80-85% of an invoice amount upfront upon a sale of the invoice to a commercial finance company
- The finance company adjudicates an opportunity based on the creditworthiness of the customer (the end debtor)
- Funds can be used for any general corporate purpose including taxes, payroll, purchasing, etc.
- Direct payment to the lender by the end customer
It’s often beneficial for a business to make use of financing that is available along the entire production cycle, from sourcing to sale. Done correctly, this requires that the purchase order financing and Invoice Financing work in concert with one another. For example, the advance rates noted above need to be set such that the funding against the invoices is enough to retire the purchase order financing on an ongoing revolving basis once the goods are delivered to the end customer, and funds should move seamlessly from one financing bucket to the other. These and other practical considerations make “one-stop” shopping solutions from a single lender an attractive proposition.
Process/Example:
1st Step: A business receives a purchase order(PO) for 100 units at the total cost of $100 from Customer
↓
2nd Step: Business can source and deliver the 100 units at a total cost of $80 from a Supplier (a 20% gross margin)
↓
3rd Step: Business discusses an opportunity with the commercial lender who agrees to fund 100% of costs and provide invoice discounting at 90% of the invoice amount
The flow of funds is as follows:
- Lender advances $80 directly to the Supplier→ Supplier fills order and ships directly to the Customer
- Business invoices Customer $100 and presents invoice to Lender
- The lender now “advances” $90 (a 90% advance rate) to the Business
- Of that→ $80 plus fees go to repay the Lender’s PO advance, and the balance goes to the Business for some general corporate purpose
- Once the Customer pays the invoice, the Lender deducts its invoice discounting fees and remits the balance.
Utilizing More Than One Financing Source During This Process Can Prove Problematic:
- Lack of coordination in setting and keeping workable advance rates in place can undermine the effectiveness of both financing programs
- Delays in funding by the invoice discounter can hold up timely retirement of the purchase order advances
- An inability of the two institutions to agree on security and priority considerations can raise costly and time-consuming disputes
- Lender reporting can prove confusing if it comes from different sources, in various formats, or on different days of the month
