CAN I FACTOR A PURCHASE ORDER?
Since the pandemic began, I have been getting calls to finance large Purchase Orders for PPE’s of all types. In most cases they were looking for a lender to take all the financial risk, so that they could create a business and earn a big profit. I would explain the facts and what it takes to get it done and in most cases I never heard back.
Purchase Order Financing does exist, and it works well but it is risky and can get complicated so it is not easy to get and can get pricey. Normally it is only offered to bigger and better businesses with a proven track record of similar successful transactions. Newer, smaller and rapidly growing businesses have a harder time, but it is possible and does get done. If there is the will and the transaction is sound, then there is a way to fund it.
Business finance professionals like ourselves should look at a request for PO Financing as a cry for help. First, we need to take the time to understand the transaction, figure out the challenge they are facing and then introduce them to the tools that will help them get it done. If the business owner is willing to do what it takes then it is possible to create something from nothing.
Supplier Credit and Factoring are the two key components of a successful PO Financing Solution. Suppliers are eager to make a sale, but they worry about being paid. When a Factor is involved in the transaction there is less chance that will happen. Irrevocable Instructions to Pay are simple to put in place, free and could be the missing link that makes the whole thing happen.
Sometimes, Factoring and renegotiating the PO to smaller and more frequent deliveries is the simple solution. The first factored invoice is used to pay for the next one. This buys time for a more trusting relationship to develop. Factoring existing Accounts Receivable and sometimes creating the cash needed to fund the first PO.
Getting a PO is not difficult, filling it to the exact terms and conditions required to make the buyer happy then having enough margin to compensate for the time and risk involved is the real challenge. There are various insurance policies that can be purchased but they do not eliminate every risk. However, if there is money to be made and everyone works together there are ways to finance a Purchase Order.