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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 they are required to fulfill customer orders or new contracts where prepayment of a significant amount of goods is required to ultimately complete a large order or contract. Many times these new orders or contracts represent the potential start to a large relationship that has the ability to grow large revenues and profits for your Canadian firm.
Is there a solution? One that you might want to consider is purchase order financing. Under this type of financing, (also referred to as ‘P.O.Financing') payment by the finance firm is made directly to your suppliers for your order or contract. It is a very unique form of working capital financing in that it allows your company to fund goods that have been manufactured or sold by a supplier. Many companies sustain a substantial burden when they have to allocated valuable cash and working capital to supplier payments.
' P O Financing ' is a solid mechanism to finance sales when you have decent gross margins to sustain the financing cost. Purchase Order finance also works well because many transactions involve extended payment terms based on supplier delivery and your own customer's final payment. That can easily in many cases be anywhere from 60-90 days, significantly increasing your ' cash conversion cycle '.
Why Would Your Company Choose TO Utilize Purchase Order Financing - Canada?
In many cases companies taking on larger orders and contracts have a significant overhead attached to the sale/project/contract. That issue, coupled with the entended 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 P O Order, and of course 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 a mature firm and 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
Your firm has the ability to 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
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 benefits all parties to the transaction re profits, deal size, etc.
Remember also that your firm has what we called that 'cash conversion cycle' (every firm has one). There is a large of often 2-3 month from the time 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, but it is clearly one that offers you a solution that traditional Canadian banking or lending would not offer.
Therefore your firm should be able to ensure that you can demonstrate the viability of your customer and that you can fulfill the order or contract via this method of alternative financing.
One of the other advantages of supplier financing/purchase order financing is simply 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?
It is clear that 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 ' in nature and must be seized upon with confidence to avoid not losing the sale or a client relationship.
The ability to foster 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 very niche part of Canadian busienss financing, and that includes flexibility around customized situations that might be unique to your order/contract.
Use the services of an expert or advisor to determine if PO Finance works for your transaction. In certain cases, in lieu 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 if created out of your order and the factoring fund method of non-bank financing is less expensive than purchase order funding.
In summary, a purchase order loan/financing is a unique niche within the area of business financing. If you are new, or not knowledgeable about this type of financing speak to a credible and experienced and trusted business advisor who will guide you through key areas of P.O. Financing including such things as minimum amounts that can be financed, credit application information, and the standard industry fees/rates.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Click Here For 7 PARK AVENUE FINANCIAL website !
7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant
.Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
7 Park Avenue Financial/Copyright/2020
