Purchase Order Financing: The Ultimate Trade Finance Solution for Canadian Businesses

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Step into the world of Purchase Order Financing because it offers transformative solutions for businesses facing traditional financing barrier

The Game-Changer in Trade Finance: Purchase Order Financing Explained

The Challenge Of Growth & Business Financing

Purchase order financing in Canada solves a bad business nightmare. What nightmare? You got the PO / Contract! Now what? We're discussing trade finance solutions in your supply chain process- so let's dig in.

Understanding Purchase Order Financing

Purchase order financing is a great tool for firms that have an unusual purchase order and contract sales financing needs but are potentially unable to access traditional financing via banks or their own capital resources within their firm. In many cases, firms are smaller, or sometimes early stage - in some cases it's just too much success via that large order/contract!

How Does Purchase Order Financing Work?

So how does it work? And does your firm qualify? Other client questions include:

Which Firms Benefit Most?

Typically Canadian firms looking for this type of financing are distributors, manufacturers, or perhaps wholesalers. A variety of industries in Canada have access to this type of financing, but those certainly tend to be the typical firms needing assistance from a purchase order financing company.

The Classic Working Capital Gap

Your need for purchase order financing arises out of what we call the classic working capital gap. What do we mean by that? It's a case of your suppliers requiring payment either upfront or within 30 days, with your firm unable to generate those funds for payment and therefore unable to fill large purchase orders and contracts in your favour. That's the classic working capital conundrum.

Meeting Traditional Finance Requirements

The obvious solution for low-cost large amounts of funds are Canadian chartered banks, but our observation is that many firms simply can’t satisfy the banks' requirements for this type of financing to occur. If your firm is growing, profitable, has a clean balance sheet and strong historical cash flows and history you of course have a solid chance of meeting bank requirements. But, as we said many firms can't satisfy all those requirements of traditional finance.

Key Aspects of Purchase Order Financing

Application Process

When you access PO financing you can have the comfort that your suppliers will be paid, and at the same time you generally have access to all the funds you need. Typical purchase order financing applications take anywhere from 2-4 weeks to complete and involve basic financial due diligence on your firm's ability to fulfill the order, who your customer is (they must be creditworthy), and your proper supplier sources must be identified and vetted.

Who Qualifies?

So, who exactly qualified for this type of financing? Naturally, your company must be in possession of a contract or order that is not cancelable by your client. The PO finance firm arranges to pay your suppliers directly via a cash advance, which alleviates all your cash flow and working capital concerns.

Cost Considerations - Purchase order financing cost

Let's cover a couple of tips and secrets around the cost of purchase order financing - It generally is in the 2-3% per month range in Canada, and that means you have to have solid gross profit margins in order to be able to sustain the finance charges in the purchase order financing agreement.

The Bigger Picture

Clearly, the higher cost of this type of financing covers the complexity and risk that the P O finance firm takes in paying for goods, waiting to get paid, and having the belief that your firm will fulfill the contract order.

Intangible Benefits

It has been our observation with certain clients that your successful completion of a purchase order finance deal typically significantly enhances your relationship with your major suppliers and of course customers, that's a secret benefit that is intangible but invaluable at the same time.

Key Takeaways

Purchase order financing is a financial solution where businesses get capital to pay suppliers upfront for verified purchase orders. This ensures that firms lacking funds can fulfill large orders and contracts.

Why It's Needed - The Working Capital Gap:

Businesses often encounter a working capital gap, where suppliers require payment either upfront or within a short timeframe (like 30 days), but the business may not receive payment from their customers for a longer duration (60-90 days or more). This creates a cash flow problem, especially for growing firms or those with large orders.

How It Works:

A PO financing company pays the suppliers directly for supplier costs, raw materials, etc on behalf of the business. Once the supplier ships and goods are delivered and the final customer pays, the business then pays back the PO financing company, typically with some interest or fees added.

Costs and Qualifications:

The costs associated with PO financing generally fall in the range of 2-3% per month in Canada. To qualify, a company must have a non-cancelable order or contract, and the customer they're selling to must be creditworthy. There's also due diligence done on the firm's ability to fulfill the order.

The Role of Traditional Banks vs. PO Financing & Supply Chain Advance

While traditional banks as a traditional financial institution provide low-cost funds, many businesses, especially smaller or early-stage ones, might not meet the banks' stringent criteria. PO financing fills this void, providing the necessary funds even if the business doesn't have a strong balance sheet or long credit hist

Conclusion

Is P O financing for everyone? Maybe not. Could it be possibly the solution to major working capital needs if your business is growing and can't be financed traditionally - we certainly think so.

FAQ

What exactly is Purchase Order Financing?

It's a financial tool that allows businesses to get capital to pay suppliers upfront for verified purchase orders, ensuring they can fulfill large contracts even if they lack the funds in their target markets.

How does it aid businesses facing the working capital gap?

This financing method addresses the challenge where businesses need to pay suppliers quickly but may not receive payment from their customers for a longer period, thus ensuring smooth operations.

Are there any specific qualifications to avail Purchase Order Financing?

Yes, firms should have a non-cancelable order or contract, and the end customer should be creditworthy. Also, there's a due diligence process to verify the company's ability to fulfill the order.

How is this different from traditional bank financing?

While traditional banks offer low-cost funds, they have stringent criteria. Many businesses, especially smaller ones, might not qualify. Purchase Order Financing fills this gap, providing necessary funds even without a strong balance sheet.

Are there any hidden costs associated with PO Financing?

Costs generally hover around 2-3% per month in Canada. It's essential to be aware of these charges and ensure that your profit margins can accommodate them.

How does Purchase Order Financing benefit start-ups or newer businesses?

For start-ups lacking an extensive credit history or balance sheet strength, Purchase Order financing pros include the way PO Finance offers a way to secure necessary funds to fulfill large contracts establish a track record in their industry and maintain a sustainable debt structure in their business while addressing key cash flow gaps.

Is Purchase Order Financing only available in Canada?

While the article focuses on the Canadian context, Purchase Order Financing is a global financial solution. Its availability and terms might vary depending on the region or country.

How long does the PO financing process typically take?

The application process of vetting the customer's purchase order usually takes a week or so, which includes financial due diligence on the customer's creditworthiness and verification of order details.

What happens if the end customer does not pay on time or defaults?

If the end customer doesn't pay, the business availing the financing is typically still responsible for repaying the PO financing company. It's crucial to ensure that the end customers are creditworthy before entering such agreements.

Can any business apply for Purchase Order Financing, or is it industry-specific?

While distributors, manufacturers, and wholesalers are common beneficiaries, PO financing is not strictly industry-specific in global trade. Various sectors can leverage this solution, provided they meet the qualifications.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Mastering Purchase Order Financing in Trade Finance | 7 Park Avenue Financial

Unveiling the Power of Purchase Order Financing in Trade Finance