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.