Caught in the Middle – Get Out of a Jam With a PO Loan

Being stuck in the middle can be a dreadful situation for the center link in a supply chain.

Your biggest customer is opening a new store and needs to stock it with one of your exclusive product lines. The manufacturer can deliver with a short lead time provided you have the cash up front, which you don’t because you just cut payroll.

You could dip into reserves, but that might put you behind schedule for next month’s bills. You have good credit, but a bank loan could take a month to go through.

So have you considered purchase order financing?

In this particular circumstance, a purchase order loan company can step in and help facilitate the transaction. First, the PO lender will do a credit check on your customer. If they are well-established and pay bills on time, the creditor can originate a loan up to the full cost of goods, or a percentage of the purchase order value.

The lender can issue a check, letter of credit or bank transfer to your supplier and cover the costs of delivery (excluding insurance, inspection or duties). Your supplier will often be required to ship the product directly to your customer, and after receipt, you issue the invoice as usual.

If the customer has an account with payment terms, the lender will often buy the debt from you at a discount and handle any further collection themselves. If your customer pays cash on delivery, the PO lender will use the payment to satisfy the loan, deduct fees and forward any remaining amount to you.

Typical beneficiaries of this service are resale companies that purchase quantifiable goods from a single manufacturer or supplier and ship them to retail stores or end-users. Due to the intangible nature of service industry products, they are generally not eligible for purchase order financing.

There is significant risk involved for the lender; if the shipment is lost, refused or if your customer otherwise can’t pay the invoice, the loan company could lose substantial income. Because of the amount at stake, there are necessarily higher-than-average interest rates and fees. The creditworthiness of your customer is also critical because they are the actual recipients of the loan; you are just facilitating and receiving the benefits of the transaction.

Startup businesses and small companies ready to break into the middle market are prime candidates for this type of lending. Purchase order financing can be available as needed whenever unusually large orders come in, and being able to fill sizeable orders quickly could help solidify your reputation as a reliable supplier. Over time, profits from these sales can add up to substantial working capital and push your business up to the next level.

Caught in the Middle – Get Out of a Jam With a PO Loan