Purchase Order Factoring
People often look for ‘Purchase order factoring’ when they receive a large order from a customer that they cannot finance.
A typical scenario will be a large customer issuing a large purchase order but they want credit terms and are not willing to pay any kind of deposit. The supplier of the goods wants a deposit or wants paying in full prior to shipping the goods. In many ways the order is a dream come true but the funding gap means that transaction may not take place.
What is often referred to as purchase order factoring is in fact a combination of trade finance and factoring. However, the finance provider will take comfort in the confirmed order that you have in place from a credit worthy customer. Based on this comfort they will be willing to issue a documentary credit to your supplier guaranteeing their payment. With this guarantee your supplier will usually be happy to ship the goods. Once the goods are received and delivered to the customer an invoice can be issued. At this stage a factoring facility will kick in and cash will be generated against the invoice to repay the trade finance facility. Ultimately the factoring facility will be repaid once the end customer who placed the order settles the invoice.
In effect this type of finance will allow the whole trade cycle to be financed right from the initial purchase order right the way through to the end customer settling the invoice.
Advantages of Purchase Order Factoring
- It allows you to target larger customers for larger orders safe in the knowledge you can finance large orders.
- If you have a confirmed order from a credit worthy customer typically no additional security is required.
- Your supplier can trade with you in confidence that they will be paid.
- Your working capital for the entire transaction can be seamlessly provided from one finance company.
Is it right for you?
If you are targeting larger customers for large orders and your require additional working capital to take advantage of those orders then this could work for you. Typically to qualify for such a facility the transaction will need a gross margin in excess of 20%.
This type of finance can facilitate the rapid growth of your business. The focus is on the quality of your customers and also the quality of your audit trail. A solid audit trail will include a confirmed order, a signed proof of delivery and an invoice issued in arrears of delivery on credit terms.
How do I set up ‘purchase order factoring’?