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Purchase Order Finance 101
Purchase Order Finance (PO Finance) is a powerful financial tool commonly offered through factors and asset-based lenders.  Though its capabilities are not limited to export-import trade, its use is so common in cross-border transactions that virtually any entrepreneur with international commerce in mind should become familiar with its capabilities.

Simply put, purchase order finance answers the needs of manufacturers and distributors when capital is necessary to fulfill an order.  Whereas factoring is brought to bear after the delivery of merchandise or performance of a service, purchase order finance provides the necessary capital to actually manufacture the goods prior to delivery and invoicing.

Successful purchase order finance is based on three criteria:

 •   a valid order from a creditworthy customer.  As in asset-based lending, the ability of the customer to pay for the order once delivered is critical to the success of purchase order finance.

 •   performance capability of the client.  Can the client manufacture or contract manufacture to meet the specifications of the customer's order?

 •   is it a "firm" purchase order?  In purchase order  finance terminology, "firm" means that the order is at a fixed price and will not change.  Additionally, if the order is delivered to specifications, will it be paid for. 

 Purchase order finance is primarily utilized by two types of companies... distributors and manufacturers.  It is generally not available for the service sector.  As a rule, distributors do not manufacture or assemble their product although many in today's markets are "contract manufacturers" and arrange for the manufacturing of a product overseas.

From the purchase order finance company's standpoint, a significant amount of due diligence is necessary to assess the client's capability to perform.  Can the client actually fulfill the order given?  Does the client have the facilities to manufacturer in the required amount, to specifications, and in the allotted time frame of the purchase order? 

Purchase Order Finance Due Diligence
Purchase orders are typically issued subject to certain agreements and representations often included on the back of the purchase order or in a vendor agreement signed as a condition of being accepted as a supplier to the customer.  Fully understanding  the terms of the purchase order and the rights of the client in the event that terms are not completely met is essential to the purchase order finance company.    

Purchase order finance will also entail investigation as to:

•  whether the manufacturer made this product before?
•  is the factory a "legal" factory?
•  how do the goods get from the factory to shipping?
•  can the mode of transport meet the delivery dates?
•  are the goods inspected for compliance?
•  how long will it take to clear U.S. Customs?
•  are their duties to be paid?
•  do the goods represent inventory?
•  are the goods insured throughout the trade cycle?
•  who will "take out" the purchase order financier?

Working Through Factors and Asset-Based Lenders
Purchase order finance companies work directly with factors and asset-based lenders.  Once an order is filled and delivered to the customer, the customer is invoiced by the client and an account receivable is created.  At this point, the purchase order finance company must be "taken out" by the factor or lender by receiving a portion of the advance on the account. 
As a general rule, most purchase order finance companies dislike working directly with lenders such as banks, much preferring the flexibility of the factoring / asset-based community.

Establishing a Relationship with a Purchase Order Finance Company
In most cases, a business owner requiring purchase order finance will work directly with their factor asset-based lender to secure such financing.  In the cases where a direct relationship is first established with the purchase order finance company, that company will refer the business owner to an appropriate factor or asset-based lender.

Earning "Double" Commissions
In addition to being a powerful tool for entrepreneurial finance, purchase orders offer industry brokers the opportunity to earn "double commissions" since most purchase order transactions end with a factor "take out".  A brief "Case Study" in purchase order finance is attached foe download here.

Important Considerations for New Brokers
The submission of a factoring deal that is actually a purchase order deal is the most common mistake made by new consultants.  Here are some simple guidelines:

•  There are virtually no purchase orders finance in the service sector.  Purchase orders involve hard goods, not services.

•  Factoring always involves goods which have been delivered.  Purchase orders involve goods which have yet to be manufactured or acquired.

•  Purchase orders that are financed are typically large (in excess of $100,000) and the order is from a very creditworthy customer.