EMAIL - sprokop@7parkavenuefinancial.com
PO Financing transforms potential into performance by providing the funds needed to fulfill large customer orders.
Unlock your business's potential with PO Financing—turn orders into opportunities without the cash flow crunch!
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer PO FINANCING solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
THE PURCHASE ORDER FINANCING COMPANY SOLUTION IN CANADA
Purchase Order financing (' PO FINANCING ' in Canada... works. In many cases, funding your contacts and POs will help take you to the next step in sales and profit growth. So let's dig in on this innovative financing solution.
Purchase Order (PO) Financing is a sales funding solution that offers a lifeline to businesses constrained by cash flow challenges, allowing them to fulfill large orders without negatively impacting their working capital.
PO Financing provides immediate funds to pay suppliers, ensuring that companies can deliver on their commitments to clients without delay. By leveraging the creditworthiness of their buyers, businesses can grow and expand their market reach while effectively managing their supply chain and day-to-day financing demands.
PURCHASE ORDER FINANCING IS THE WORKING CAPITAL SOLUTION
Firms in the SME (small to medium enterprise) often have been challenged with financing working capital inventory/product needs related to new contracts or large orders. What a conundrum - having an order and, on the other hand, not being able to fulfill it.
Enter, stage left - PO Financing!
A KEY BENEFIT OF P O FINANCING
One of the hidden benefits of this type of P O loans for small business, which is more expensive than traditional financing, is the fact that they allow you to demonstrate to more traditional lenders, i.e. Canadian chartered banks and asset-based lenders, that your firm can establish higher levels of sales with clients you might otherwise not be able to facilitate with your products.
In addition, your firm only will pay interest on money borrowed in your transaction - allowing you to avoid cash flow problems arising from larger orders and contracts.
PROTECTING YOUR CASH FLOW
Funding your purchase orders will cover up the majority of the value of a purchase order and, when properly structured, complement your line of credit with another financial institution.
This protects your working capital but also provides short-term borrowing capacity when needed. In addition, the loan terms are timed so that there would be no payments to the financing company during the transaction.
WHY USE PO FINANCING?
Using P O Financing companies is a solid financing mechanism to make your business grow and avoid uncomfortable tight cash flow situations. The ability to access credit for larger contracts, quick inventory and growth projects at the same time as keeping an eye on profitability by paying suppliers upfront in order not only to get special prompt pay discounts and pricing is a key benefit to Canadian business owners.
Your company can also avoid currency exchange fluctuations when accepting international orders or launching new markets domestically in Canada or abroad.
WHAT TYPES OF INDUSTRIES USE PURCHASE ORDER FINANCE?
Many different industries can take advantage of PO / Contract funding business loans - Includes exporters, importers, firms in wholesale distribution, and manufacturing companies.
WHAT IS THE P O FINANCE PROCESS? HOW DOES PURCHASE ORDER FINANCING WORK?
Purchase order financing works as follows: The entire concept of purchase order financing is based on what will happen, not what has happened.
The essence of the financing is the ability of your supplier to be paid by the inventory finance and purchase order finance firm in advance. The result - you complete your transaction - ship and bill your goods/services, and can bill and collect on those receivables and... profits!
PURCHASE ORDER FINANCING VS FACTORING
The one key technical point of inventory and purchase order funding is the fact that the firms that finance these two items often have no interest in financing your receivables - they are, in fact, just specialized lenders that are experts in inventory and purchase orders and letters of credit and the due diligence required to make this financing work.
QUALIFYING FOR P O FINANCE FUNDING
To qualify for funding, you need a purchase order with an established customer willing to provide clear payment terms and conditions. In addition, it is important to have a reputable supplier! The application processes for small businesses are simple and fast. The PO Financing needs to arise.
If your sales drop, there is no financial commitment around order volume, etc., to use financing.
As with factoring, purchase order financing providers are more concerned about the creditworthiness of the customer involved rather than that of your business. Therefore, the costs associated with purchase order financing can vary from the transaction but typically involve fees comparable to factoring and may be higher in some cases based on your transaction's overall quality and complexity.
FINANCING THE RECEIVABLE IN YOUR P O FINANCE SOLUTION
That raises a technical point you must understand, which is simply that the inventory and PO finance firm expects to be paid when you generate an account receivable.
Therefore it is critical that you have a receivable financing facility because your bank line of credit allows you to facilitate the drawdown of that account receivable. A/R factoring/financing is the last mile that finances accounts receivable to pay out the PO financing debt incurred.
The good news - many firms can finance both your orders, as well as your receivables.
WHAT IS THE COST OF P O FINANCING?
You can expect to pay higher rates for financing inventory and purchase orders. However, the reality is that you can increase sales significantly as other traditional finance entities have backed away from this type of financing.
So, how does this all work? The overall process for purchase order financing is fairly straightforward - based on our inventory and purchase order and contracts in hand, you identify the supplier arrangements you need to make to facilitate products.
Payment is made to your suppliers via cash or a letter of credit. For example, if your gross margin is 30% and your purchase order is for $100,000.00, then naturally, the purchase order or inventory finance firm usually is willing to advance 70k to your supplier as payment in full. At that point, when goods are shipped and a receivable is generated, then your PO finance partner expects to be paid via the customer invoice.
CASE STUDY - ACTUAL PO FINANCING TRANSACTION - 7 PARK AVENUE FINANCIAL
A Canadian food distributor received a PO from a large Big Box Retailer in the US.
The size of the PO was beyond the company’s ability to self finance.
7 Park was engaged to source the required $1M PO financing facility.
The supplier is based in Asia and the Canadian distributor had a well-established working
relationship with the supplier which resulted in better-than-average payment terms.
The basics:
Retail value of the transaction: $1M.
Cost of goods: $600K
Distributor share of financing: 10% of $600K ($60K)
Payment terms to the supplier: 50% due at the of shipment ($300K) from port, 50% balance due upon receipt by the retailer ($300K) 30-40 days after shipping date.
Payment terms from retailer: 15 days after receipt of goods.
Funding schedule:
Shipping (Day 1): PO funder pays supplier $240K, Distributor pays supplier $60K, Total $300k
Retailer receives goods (Day 30-40): PO funder pays supplier $300K. Supplier now paid in full.
PO Funder is paid out in one of two ways:
1. They wait until the retailer pays the invoice $1M and repay themselves for funds disbursed to date $540K + fees and interest. Balance of the funds are forwarded to the distributor OR
2. The invoice is financed at the time the goods are delivered to the retailer which accelerates the repayment to the PO funder
Every deal is different and the commercial terms will vary based on the relationship between the distributor and supplier and the distributor and retailer.
“The devil is in the details” and it is important to have an experienced advisor working with you to help work through the mechanics. It can be the difference between getting the deal done or having it die!
CONCLUSION
When you have a large purchase order that will put your company on a higher growth trajectory, it's time to consider PO financing.
This is an excellent option for when cash flow isn't enough and can help ensure access to financing while giving more flexibility in meeting orders without risking financial instability from taking on large orders and contracts to secure financing to fulfill larger orders and customers' commitments for solid new business opportunities.
Don't let your ability to finance your company be an obstacle to your growth.
Seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your business finance needs or the need for more information when it comes to advance payment challenges that small business owners face every day in Canada as they exploit new business opportunities here and outside Canada.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What are the risks and benefits of PO financing?
PO financing is a cash-flow solution for companies that need to take on bigger orders with confidence. Purchase order financing provides liquidity so you can pay your staff, suppliers, and even investors if necessary without putting yourself at risk financially or facing delays in delivering an order.
However, PO Financing comes with its own set of challenges that should be considered before implementing this type of strategy to fulfill a customer order via short-term financing to help your business grow and take a firm to the next level of growth. Risk is assessed based on the buyer's creditworthiness and the supplier’s ability to fulfill the order.
How does P O Finance benefit a small business?
By providing upfront cash to pay suppliers, Purchase order finance helps small businesses take on larger orders without affecting their cash flow when financing purchase orders and contracts with the benefits of dealing with a bank for a business loan, as an example of a larger traditional financial institution.
What differentiates PO Financing Companies from traditional loans?
Unlike traditional loans, PO Financing is secured against purchase orders, not the company’s credit, making it more accessible for businesses with solid clients via access to business cash flow until the customer pays. The financing company deducts their fee from the final transaction as clients pay the financing company directly.
How quickly can a business access funds through PO Financing?
Funds are typically accessible within a few days to a week after the lender verifies the purchase orders and conducts due diligence.
Can new businesses qualify for PO Financing?
Yes, new businesses can qualify with a PO financing company if they have creditworthy customers and legitimate, confirmed purchase orders when the finance company approves the transaction.
What impact does PO Financing have on a business's debt ratios?
Since it is not considered a traditional debt, PO Financing does not negatively affect a company’s debt ratios.
What is the difference between PO Financing and Invoice Factoring?
PO Financing provides funds before delivery and invoicing, while invoice factoring involves selling receivables post-delivery.
How does a business apply for PO Financing?
The process involves submitting the purchase order details and client information to the financier for assessment and approval.
Are there specific industries that benefit most from PO Financing?
Industries with high product demand but long manufacturing cycles, like apparel and electronics, benefit significantly. Companies must have good profit margins to absorb the purchase order financing cost from the time of cash advance to invoice financing and final customer payment.
What legal considerations should a business be aware of with PO Financing?
As with all small business loans businesses should understand the agreements involved, which may include liabilities and recourse terms depending on the financier.
How does PO Financing affect supplier relations?
It generally strengthens supplier relations as businesses can ensure timely payments via purchase order financing companies, which fosters better terms and trust.
