PO Financing- the ideal financing tool for the right situation
By Mike Semanco, President, Hennessey Capital
For many entrepreneurs, landing that large purchase order is just what the doctor ordered. You worked hard to win the client, outlasted the competition and are in a position to build on your success. The team celebrates until someone asks, “Do we have the cash to purchase the large amount of supplies needed to deliver the project?”
Growth can be a major drain on a company’s cash and a major reason why we stress the importance of cash forecasting.
Although purchase orders are covered in the Uniform Commercial Code as an asset of a business, it is not an asset that is easily financed, unlike accounts receivable, inventory, equipment or real estate.
Purchase order financing is offered by very few finance companies and is usually best suited for distributors. Manufacturers and service providers are not ideal candidates for PO financing due to the concern of performance risk. PO Financing for distributors allows for the securing of goods by way of letter of credit (promise to pay once certain stipulations are met), so that the distributor can increase its buying power with suppliers. In the case of a distributor, they are not responsible for manufacturing the product so performance risk lies with the supplier. PO financing will be structured so that the supplier will not receive payment unless they produce the proper product as defined in the PO, which eliminates the issue of performance risk and thus satisfies the PO funding source.
PO financing carries more risk to a lender than traditional A/R financing thus the cost is more than traditional A/R financing. Due to the increased cost, companies must make sure they have sufficient margin in the order. PO financing is typically used in conjunction with an A/R line of credit or factoring facility so that once the product is received by the end user, invoices can be financed and the cash can be used to repay the PO funding source. This opens up the PO finance facility to be used for new orders.
Purchase order financing is not ideal for every business but in the case of a distribution model where product needs to be purchased and sold to large entities or retailers, it could be a great tool to secure the cash needed for new growth.
Access To Capital
We recently held a webinar discussing how entrepreneurs can gain access to capital and how to determine what type of financing makes sense for their business.
Take a listen below…. (it’s about 20 minutes long).
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Where To Turn When Your Bank Credit Line Shrinks, Part 1: Asset Based Lending
In today’s credit crunch, many business owners are having a tough time finding as many options for needed capital as they once did. The latest topic of the show is “Where to turn when your bank’s credit line shrinks.” This is part one of two, and covers asset based lending.
During this discussion, our interviewer rejoins Mike Semanco, the president of Hennessey Capital.
In the first part of the show, Mike explains what the credit crunch is, and how it affects your business. Mr. Semanco goes on to explain what asset based lending is, and how it can help business owners. This episode is wrapped up with a discussion on other options for financing, in case asset based financing is not the best option for you. Overall, business owners should hopefully find this discussion very informative and helpful.
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Access to Capital Webinar
Entrepreneurs throughout the country are encountering challenges in gaining access to capital. With credit markets dried up and few banks lending to small businesses, it’s become increasingly difficult for small enterprises to get the working capital they need to grow their business. If you are interested in learning more about the financial spectrum and where to turn when your credit line shrinks, register for the upcoming “Access to Capital” webinar.
Thursday, March 18
9 a.m. EDT
E-mail name and company to: Nicole@macombcountychamber.com.
