Just in: Your worst business nightmare. You have the order/contract. What now? Now what?

For firms with unusual needs for purchase orders and contract sales financing, but who are unable to access traditional financing through banks or within their firm’s capital resources, purchase order financing can be a great option. What is trade finance P O financing? Does your company qualify? How much does it cost? These are great questions. Let’s now explore the answers!

Distributors, manufacturers and wholesalers are the most common types of Canadian companies that seek this type financing. There are many industries in Canada that have access to this type financing. However, these tend to be the most common ones.

The classic working capital gap is what causes your need for purchase order financing. What does this mean? This is when your suppliers ask for payment upfront or within 30 days. Your firm may not be able to generate the funds necessary to pay your large order or contracts. You won’t get payment for 60-90 days if your supplier asks you for payment in advance, 30 days or more, depending on how your build cycle is.

You don’t want orders to be turned down or a loss of market share.

Canadian chartered banks are the obvious choice for large, low-cost funds. However, our observations show that many companies simply cannot meet the requirements of banks for this type financing. You have a good chance of meeting bank requirements if your company is profitable, growing, and has strong cash flows and historical history. However, that is often not the case. We speak to many clients who are seeking alternatives to their growth challenges.

You can feel confident that your suppliers will get paid and you have the ability to access all the funds you require. The typical purchase order financing application takes between 2 and 4 weeks. It involves basic financial due diligence about your firm’s ability to fulfill the order and who your customer is (they need to be creditworthy). Your proper supplier sources also have to be identified and vetted. It’s that simple.

What are the essential pre-requisites for a solid PO? Financing deal? Your company must have a contract that your client cannot cancel. P O finance firms arrange to pay suppliers directly. This eliminates any cash flow or working capital worries. When you ship the goods, the transaction is complete and your receivables have been generated. This is when the purchase order finance company expects to receive payment. In traditional practice, this is handled by your firm’s monetization of its receivable via bank or factoring facility. Because they guarantee payment to your P O company, factoring facilities can be a great partner in the P O financing strategy.

Let’s talk about a few tips and tricks around purchase order financing. It is usually in the 2-3% per month range in Canada. This means that you need to have solid gross profits margins to support the finance charges. Let’s face it, your company has made 750k in revenue over the past couple of years. Now you get the large order for 1 million dollars from a customer. For the equivalent of your entire business year, would you not give up 2-3% of your profit margin to get one sale? This is something we think you should seriously consider! The higher cost of this type financing is offset by the complexity and risk the P O finance company takes in paying goods, waiting for payment, and believing that your firm will meet the contract order.

We have observed with clients that a successful purchase order finance deal can significantly improve your relationships with major suppliers and customers. This is a hidden benefit that is not only intangible, but also invaluable.

Is P O financing for everyone. Perhaps not. It could be the answer to your major working capital requirements if you have a growing business that cannot be financed traditional. We think so. Talk to an experienced, trustworthy and reliable expert in purchase order financing to discuss your options.