What is Purchase Order Finance? (PO Funding)
Purchase Order Finance Large orders, seasonal sales and business expansion can place real pressure on your cash flow. Some suppliers want you to pay cash on delivery while your customer wants to pay you net 30 to 60 days. At the same time, labor, packaging and shipping costs all have to be met. While the opportunities for future sales and growth may be great, these conditions constrict the life blood of your business – your cash flow. Our purchase order finance service (PO Finance) exists to make your deals not only possible, but profitable. We can provide funds against confirmed completed orders. Purchase Order Facility You have a confirmed order from a creditworthy customer but lack the cash to fulfill it We can advance up to 80% of the confirmed purchase cost to your supplier. We pay your supplier or open a letter of credit. You deliver the goods and we invoice your customer. We collect the invoice payment from your customer and pay you the balance between the order value and the amount paid to your supplier, minus our fees and cost of money used, once payment has been received. You want additional funding to finance single or multiple transactions with creditworthy customers Then our Receivables Funding Facility is the best solution. You deliver the goods to your customer obtaining proof of delivery and acceptance of the goods. You invoice us for the goods at an agreed discount and we advance you up to 80% of the value of your invoice. We invoice your buyer for the full amount and collect payment according to your agreed terms. We pay you the balance less our administration fees and cost of money used, once payment has been received.
PO Financing – How it works
1. Your buyer gives you a purchase order for goods.
2. You give your supplier your company’s purchase order to fulfill the buyer’s purchase order. The gross margin between the two purchase orders should be at least 18%.
3. Your supplier ships goods (finished goods) to your buyer. Payment to your supplier is made by the funding source immediately or some time in the future subject to the negotiated terms. This is called Purchase Order Financing.
4. The goods (finished) are then sent to your buyer.
5. You send your invoice for your buyers order to the funding source for factoring.
6. GFR factors your invoice to your buyer. We advance you funds against this invoice less any factoring and purchase order financing fees. In this case, the funds are used to make payment to GFR to pay off the amount we paid to your supplier for the purchase order financing plus any purchase order fees for our services.
7. When your buyer pays the invoice per terms we collect our factoring advance and interest charges. The remaining funds left are forwarded to you. Examples of PO Funding US Supplier to US Buyer You are an apparel manufacturer. You just received a large order but the suppliers of the goods will not extend any credit for the goods you need to fulfill the order. Your sales price to your buyer is $105,000 and your total cost to produce the goods is $75,000. Your gross margin is 40%. GFR will arrange to purchase the goods for you from your supplier, and fund the transaction. On delivery of the goods you will raise the bill for $105,000. With an 80% advance then clear the Purchase Order Transaction of $75,000 and there will be $9,000 available for your working capital less the Purchase Order Finance fees. On collection of the receivable you will receive the unadvanced 20% less a small fee for the receivables funding. Foreign Supplier to US Buyer You are a air conditioning unit distributor importing units from Taiwan. You do not touch the completed goods, they will be shipped directly to the buyer, a large U.S. retailer. The cost of the goods is $500,000 and you will sell them to the buyer for $700,000. Gross margins are 30% (after all importing costs). GFR arranges to open a Letter of Credit to your supplier with performance requirements for your supplier to comply with relating to delivery. When the goods arrive satisfactorily your Taiwanese supplier will be paid. When the goods are billed the receivable will be funded and the purchase order finance paid from the funds generated from the receivables funding. US Supplier to US Buyer You are an apparel manufacturer. You have been in business for 5 years and have a good Profit and Loss Statement and Balance Sheet. You just received a large order and are maxed out on credit from your suppliers. Your sales price to your buyer is $100,000 and your total cost to produce the goods is $75,000. Your gross margin is 25%. GFR will purchase the goods for you from your supplier, give you up to 45 days for your supplier to produce the finished goods, charge you a 5% purchase order fee ($5000, 5% of $100,000) and factor your receivables. Foreign Supplier to US Buyer You are importing telescopes from China. You do not need to touch the goods, they will be shipped directly to the buyer, a large U.S. retailer. The cost of the goods is $500,000 and you will sell them to the buyer for $700,000. Gross margins are 20% (after all importing costs). GFR opens a Letter of Credit to your supplier and will factor the receivables. When the goods are shipped your Chinese supplier will get paid. When the goods are landed in the U.S. and shipped to the U.S. buyer, GFR will factor the receivable and pay the purchase order from the funds advanced. Foreign Supplier to Foreign Buyer You are an international fish broker. You are buying fish in Jakarta from a reputable supplier and selling it to a credit worthy buyer in Canada. The gross margin on this sale is 18%. GFR will arrange to get the transaction financed by wiring funds to your supplier of fish for $40,000 and collect payment from the Canadian buyer of $55,000, less our factoring fees, insurance and inspection fees. We offer purchase order finance transactions for all types of transactions. Every purchase order finance transaction stands on its own. We look at your business history, the credit worthiness of the buyer, the ability of your supplier to produce the goods, and if the transaction is profitable for all parties.
Business History We consider purchase order funding for those organizations with a track record of producing goods. Your company may be young or a start-up, but your company management must have a proven track record to produce the goods.
Buyers Purchase Order Your buying firm must be reputable with a good credit line. The purchase order must be verifiable.
Suppliers Your suppliers must know your product and be able to produce it in time and to meet your buyer’s terms. The supplier must be a firm with a good business history and track record of producing goods.
Profitability The transaction after all expenses must make a profit for all parties. Payment of the money lent to support the transaction can come from any number of sources such as factored receivables. Purchase Order Financing is available only to qualified customers. P.O. Financing falls into two types: o Finished Goods o Non-Finished Goods Finished Goods refers to transactions where the goods are never touched by you. Usually these goods go directly from your supplier to your buyer. You never take direct possession.
Non-Finished Goods When you the seller take possession of the goods either in a raw state (such as yarn to make blue jeans) or a semi finished state (partially sewn blue jeans). In either case you must take possession of the product.
Finished Goods Much easier to finance than Non-Finished Goods. GFR at this time only deals with finished goods.
In order to consider P.O. Financing for your firm we will need:
- Completed P.O. Application Form
- Your invoice to buyer
- Your supplier’s invoice
- Your purchase order to your supplier
- Profit on transaction – gross margins >18%
- P&L (most recent) o Balance Sheet (most recent)
- Time frame to produce goods
- Credit information on your buyer
- Supplier Information
- Finished Goods