If you find yourself with a purchase order from your customer but not enough funds to pay your supplier, you might wonder: How does funding against purchase orders work?
Loans against purchase orders are called purchase order financing. PO financing helps companies who lack the cash flow to purchase inventory to fulfill confirmed purchase orders. In many instances, the purchase orders are new or large orders that will help the company to grow. PO financing companies, such as Gateway Trade Funding, work with startups, growing companies, and companies in turnaround mode. As well as companies in bankruptcy or companies that are being reorganized. This product goes hand in hand with a factoring facility, whereby an invoice is funded before receiving customer payment.
When you partner with Gateway Trade Funding or another Purchase Order lender to obtain a purchase order facility, the following process takes place:
1) Your customer submits a purchase order to you, and with that, you place an order with your supplier for the products you need to fulfill the customer purchase order.
2) A purchase order request is then submitted to Gateway or your PO financing company. They will provide you with up to 100% financing for pre-sold inventory. The financing will be either a letter of credit or a wire transfer payment after shipment, whichever is preferable to the supplier.
3) When your supplier produces products that are ready to ship, an inspection is carried out. Although, most clients already have an inspection process in place. When the goods get placed onto the ship, airplane, or truck, documents are issued. Documents are sent to the bank for the supplier to draw against the letter of credit supplied by the PO financing company. If payment is by wire transfer, the PO financing company will advise what documents are required. Upon receipt of those documents from the supplier, the wire transfer gets sent to the supplier.
4) Then finally, your customer receives the products, and you issue an invoice to your customer. The PO finance company gets repaid from a factor; While a percentage of your invoice is made available to you to pay off the Purchase Order facility. The factor will then collect the payment from the customer, and you get paid the balance less their fees.
Purchase Order financing is a quick, short-term, off-balance sheet finance facility. In fact, it supplements your existing capital sources and replaces equity investment while extending your working capital.
If you have additional questions about how loans against purchase orders work, or you would like to get started today, give the financial experts at Gateway Trade Funding a call at (847) 861-1720.