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Purchase Order Financing Helps Firms Gain Essential Funding Earlier In The Manufacturing Process

April 9, 2013

Middle market companies that access traditional bank financing often must give up equity in order to gain working capital. As this is not very palatable, there are a few options beyond plain vanilla. In earlier posts we have explored Accounts Receivables financing, but keep in mind there is a second option, namely Purchase Order financing, that can keep working capital flowing through 100% of the manufacturing timeline without putting up equity.

A cargo ship leaving the Bay area.

In a nutshell: With accounts receivables financing, also known as factoring, the firm that factors their goods does so after the goods have been purchased, shipped into the country, or trucked domestically.  With purchase order financing, also known as PO financing, the company gets cash to pay the supplier before the invoice or accounts receivable is created.

Why would a small or medium size company use purchase order financing?

For small manufacturing businesses with credit-worthy clients, instead of committing capital or equity to start manufacturing, the firm gains breathing room to use funds for other expenses.

An example: Receiving a purchase order for the production of electronics, and utilizing PO financing to pay the start-up costs for an OEM to produce finished goods.

Consider, for example, the industry of electronic contract manufacturing. In the current competitive environment, the heartbeat of an Electronic Manufacturing Services (EMS) firm is inventory turns. Companies can be clobbered when trying to balance the funding of an entire array of assemblies from overseas suppliers, with the actual orders. Inasmuch as a firm needs sophisticated supply chain management software to precisely estimate risks and timing, they also need access to lots of cash.

If the EMS were to set up a financial arrangement to acquire PO financing, they could gain essential funding for the manufacturing process and build inventory far earlier in the game.

Having a lender in place to smooth out the lumpy process of matching POs and getting paid, is absolutely crucial.

For small or middle tier companies, this can be a highly attractive option. If your company has a balance sheet that is not acceptable to a bank, or for other reasons you don’t have access to a financing source that doesn’t require a pledge of ownership, consider a firm that can provide purchase order financing.

Photo courtesy of Creative Commons 2.0, Derell Licht.

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