Purchase Order Financing : A Canadian Business Financing Solution

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Fulfilling Customer Orders Made Easy: An In-depth Look at Purchase Order Financing in Canada

 

Purchase Order Financing? Is it your solution to growth, cash flow, and working capital challenges? Canadian business owners and financial managers are always challenged when required to fulfill customer purchase orders or new contracts where prepayment of a significant amount of goods is required to complete a large order or contract ultimately.

 

INTRODUCTION

 

Within Canadian business financing, purchase order (PO) financing is a solid solution that helps businesses with the necessary working capital to execute their customer orders and contracts. This short-term capital injection proves significantly beneficial for manufacturers, wholesalers, distributors, and import/export enterprises grappling with cash flow constraints or contending with substantial, unforeseen orders.

 

WHAT IS PURCHASE ORDER FINANCING

 

Purchase order financing, alternatively termed PO funding or trade financing, is an innovative financial strategy that equips businesses with the funds required to manufacture or acquire goods that have already been sold to their customers.

 

It serves as a financial safety net for companies that attract sizable orders yet face a shortfall in immediate cash flow or lack sufficient inventory to cater to this demand.

 

Businesses can more effectively manage their cash flow by accessing funds upfront to cover the costs of fulfilling customer orders. This means companies can accept larger orders without worrying about their cash-on-hand or inventory limitations, facilitating business growth and increasing market competitiveness.

 

Moreover, purchase order financing is not a loan, so it doesn't add debt to the balance sheet regarding company liabilities and does not require them to put up collateral. Instead, the funding is secured by the purchase order itself, which means the repayment comes from the revenue of the fulfilled orders.

 

This financing solution makes PO financing an attractive option for businesses aiming to maintain a healthy balance sheet while meeting increasing customer demands.

 

 

DOES YOUR LINE OF CREDIT FACILITATE LARGE ORDERS?

 

Typically, any line of credit needs the company has in place cannot facilities larger transactions involving a large purchase from a new or existing client and may include work in process inventory timing and pressure on your cash conversion cycle.

 

P/O FINANCE IS GROWTH FINANCING!

 

A new large purchase order or contract often represents the potential start to a large relationship that can grow large revenues and profits for your Canadian firm. Is there a solution?

 

One that you might want to consider is purchasing order financing. Under this type of financing (referred to as ‘ PO Financing '), the finance firm's payment is made directly to your suppliers for your order or contract. It is a unique form of working capital financing, allowing your company to fund goods manufactured or sold by a supplier, thereby relieving the stress of cash flow shortages during your business process.

 

THE FINANCIAL BURDEN OF LARGE NEW ORDERS AND CONTRACTS

 

Many companies are financially burdened when allocating valuable cash and working capital to supplier payments. ' P/O Finance ' is a solid mechanism to finance sales when you have decent gross margins to sustain the financing cost. The PO Financing company solution works well because many transactions involve extended payment terms based on supplier delivery and your customer's final payment.

 

That can easily, in many cases, be anywhere from 60-90 days, significantly increasing your ' cash conversion cycle. ' Purchase Order financing rates are higher than most financing based on overall complexity and risk but are an effective trade finance solution and are a part of supply chain financing solutions available to Canadian business owners. Export financing can also be augmented with EDC solutions.

 

WHAT ARE THE BENEFITS OF PURCHASE ORDER FINANCING

 

Purchase order financing offers numerous advantages to small businesses, including:

 

1. Ability to Fulfill Large Orders: PO financing empowers businesses to take on and fulfill substantial orders which they might otherwise be unable to afford, preventing missed opportunities and potential revenue loss.

2. Maintenance of Positive Supplier Relationships: This type of financing ensures businesses can promptly pay their suppliers, despite any cash flow deficiencies, thereby fostering positive and reliable relationships.

3. Simplified Financing Option: PO financing is a straightforward, accessible option requiring no credit checks or extensive documentation. The process can typically be completed within a few days, streamlining the funding procedure.

4. Flexible Payment Terms: Providers of PO financing often offer adaptable payment terms, enabling businesses to manage their cash flow and financial planning better.

 

 

WHY WOULD YOUR COMPANY CHOOSE A  PURCHASE ORDER FINANCING COMPANY 

 

Companies taking on larger purchase orders and contracts often have a significant overhead attached to the sale/project/contract. That issue, coupled with the extended payments, we have already referred to drains operating cash flow for your day-to-day operations. This allows you to complete the order, generate receivables from the PO Finance  Order, and collect from your customer. The financing charge is typically in the 3=5% range, so there needs to be a clear indication that your firm has the gross margins to support an additional cost in that range.

 

Firms with higher gross margins are great candidates for purchase order contract financing, and they are less so if they are in a low-margin commodity-type business. It’s all about the gross margin!

 

REASONS WHY YOUR FIRM MIGHT NEED TO ACCESS ORDER/CONTRACT FUNDING :

 

It is not hard to imagine why suppliers are asking for upfront payment. The typical reasons that we hear from our customers are:

 

1. They have reached their credit limits with suppliers of their bank

 

2. Many suppliers are overseas these days and do not want to commit capital to companies in other countries

 

3. Your firm is not mature, is in early-stage or start-up mode, and does not have the capital resources to commit to larger revenue opportunities via order financing. Therefore the simple financing process around paying your supplier via a letter of credit from the P O lender and then monitoring for delivery and acceptance, and payment to your firm is an attractive potential financing solution.

 

 

 

KEY POINT - As a technical point related to Purchase Order financing, business owners /financial managers should note that payments made by the P O Funding source do not include any taxes that may be charged to your order or deposits you have already received from buyers.

 

 

PREREQUISITES FOR A SUCCESSFUL PURCHASE ORDER TRANSACTION:  

 

Transactions are based on the reselling of manufactured products and finished goods.

 

  

HOW DOES PURCHASE ORDER FINANCING WORK?  

 

Your firm can generate reasonable profit after financing costs Suppliers are bona fide, and legitimately verifiable end-user client has a good commercial credit history.

The actual purchase Order must be non-cancellable

 

 WHAT IS PURCHASE ORDER FACTORING? 

It means that the customer promises to pay after the products are delivered. Because this arrangement creates a contract, the purchase order is valuable to companies, known as factors. A factor can fund a company's purchase order and give them the cash to produce and fulfill it. It is a structured finance solution that works.

 

At 7 Park Avenue Financial, many new clients enquire about P O's that require financing for less than 100k.

 

While this is possible, it is generally accepted in the marketplace that orders over this amount are somewhat more financeable and benefit all parties to the transaction regarding profits, deal size, etc. Remember also that your firm has what we call that 'cash conversion cycle' (every firm has one).

 

IMPLICATIONS OF FINANCING ON YOUR OPERATING CYCLE

There is a large number, often 2-3 months from when you receive orders, build and ship inventory or product, and then wait 30 days (or longer!) to collect from your customer. Purchase order financing is a solid solution to your cash conversion cycle. At 7 Park Avenue Financial, when we put together a purchase order financing facility, we stress to clients that this is very much an alternative financing scenario. Still, it offers you a solution that traditional Canadian banking or lending would not provide.

 

Therefore, your firm should ensure that you can demonstrate your customer's viability and fulfill the order or contract via this alternative financing method. One of the other advantages of supplier financing/purchase order financing is that from start to finish. It can be set up in approximately 14-21 business days, assuming your full cooperation on application forms, backup info, etc. Most Canadian business people recognize that financing of a certain size in a traditional banking or term lending environment might take significantly longer to complete.

 

 

BENEFITS OF PURCHASE ORDER FINANCING: HOW DO PURCHASE ORDERS WORK IN LOCAL / EXPORT FINANCING?

 

Utilizing this alternative funding method for certain sales allows you to take on orders and contracts, even in other geographics that otherwise might not be able to be considered as part of your growth strategy. Many opportunities are ' seasonal ' and must be seized confidently to avoid losing the sale or client relationship. Fostering good relations with suppliers re your payment history is key in any business relationship.

 

Because of the ' specialty finance ' nature of P O Funding, you benefit from lender expertise in this niche part of Canadian business financing, including flexibility around customized situations that might be unique to your order/contract.

 

KEY POINT - Business owners should be proactive in planning their financing around any significant addition in new business - this avoids the proverbial cash crunch and allows you to prevent reactive processes that, to say the lease, can be stressful for the business owner. Use the services of an expert or advisor to determine if PO Finance works for your transaction.

 

In certain cases, instead of a business line of credit, a combination of receivable factoring and Purchase order finance might be best suited to finance the transaction in combination with each other, given that a receivable is created out of your order and the factoring fund method of non-bank financing is less expensive than purchase order funding.

 

 

CONCLUSION - PURCHASE ORDER FINANCING CANADA

 

Purchase order financing is critical for numerous Canadian businesses, answering cash flow predicaments and facilitating expansion. Like any financial commitment, fully comprehending the terms, expenses, and consequences involved is crucial. Whether purchasing order financing or other funding alternatives, selecting the appropriate financial strategy can catapult your business to unprecedented success.

 

Let the 7 Park Avenue Financial team know how a purchase order financing company works and alleviates the cash flow challenges small businesses face in Canada. In summary, a purchase order loan/financing agreement is a unique niche within business financing and an effective means of financing working capital.

If you are new or not knowledgeable about this type of financing, speak to 7 Park Avenue Financial,  a credible and experienced and trusted business advisor who will guide you through key areas of Purchase Order Financing, including such things as minimum amounts that can be financed, credit application information, and the standard industry fees/rates. Short-term financing for larger orders managed successfully, will help your company achieve its growth goals while utilizing effective supplier financing arrangements.

 

  

 FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION   

 

What is Purchase Order Financing?

 

Purchase order financing, or PO funding or trade financing, is a financial instrument that empowers businesses to shoulder the expenses associated with manufacturing or procuring goods already sold to their clients. It is a financial safety net for firms that attract large orders but grapple with immediate cash flow or inventory constraints until the customer pays

Consider securing a significant order from a client, but present cash assets or inventory are inadequate to fulfill the order. With purchase order financing, this business opportunity need not be lost. A PO financing provider pays your suppliers directly, ensuring the order can be completed. Subsequently, you bill your client, who settles the payment now with the financing provider. The financing company deducts its fee and transfers the remaining balance to your account.

 

What are the Costs Associated with Purchase Order Financing?

 

A purchase order financing agreement has several benefits, but weighing its costs is crucial. Generally, charges for purchase order financing oscillate between 2-5%  of the monthly PO value. Although this may appear minuscule, it can translate to an annual percentage rate (APR) surpassing 40% when converted, making PO financing a considerable investment for businesses.

 

What are the  Pros and Cons of Purchase Order Financing?

Purchase order financing carries many unique benefits and potential downsides for businesses. On the positive side, it's accessible to growing companies and startups, doesn't overly depend on your credit rating, and offers quicker funding than traditional bank loans. The customer pays the financing company directly.

Nonetheless, it also has certain constraints. The company must cover the remaining balance if the financing company approves a business for a smaller percentage of the funding of supplier costs. In many cases, a personal guarantee may be required.

What are Other Options Besides PO Financing?

 

In some cases, PO Financing won't match business needs. If that is the case, several alternative funding mechanisms exist to explore, including:

Invoice financing, invoice factoring

Merchant cash advances from online financing companies

Business lines of credit

Term loans / Small business loans

Government SBL loans. Government loans offer versatility for varying business types of financing, and requirements vary compared po financing companies.

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