Q: When should purchase order funding be used?
A: Purchase order funding should be used only when most other forms of financing have been exhausted. For example, the following options have been considered but cannot be used for reasons shown.
- Credit lines cannot be expanded
- Real estate, inventory, and equipment cannot be borrowed against
- Receivables cannot be sold.
Q: What minimum gross profit margin should the purchase order have?
A: We recommend a minimum gross profit margin of 30% on transactions in which purchase order funding is being considered. You should determine if the transaction will still be profitable after paying the purchase order and accounts receivable financing fees involved in purchase order funding.
Q: What types of companies should use purchase order funding?
- A: The following types of companies that are selling to a creditworthy customer can use purchase order funding.
- Distributors
- Wholesalers
- Manufacturers having strong financial's and with experience in the type of product for which the purchase order funding is being requested
Q: Is a personal guarantee required to obtain purchase order financing?
A: Yes. A personal guarantee is always required to obtain purchase order financing.
Q: Can a manufacturer use purchase order funding if they do not have experience in manufacturing the product?
A: Maybe. It may be possible for a manufacturer to obtain purchase order funding if they subcontract the manufacturing of the product to a company with experience in manufacturing that type of product.
Q: How important are the financial's of my company and its principals in obtaining purchase order financing?
A: The importance of the financial's of the company and its principals increases as the risk of satisfying the purchase order increases. For example, your company cannot be in danger of becoming insolvent during the term of the purchase order. The amount and complexity of the manufacturing required to deliver the product increases the risk that the purchase order will not be satisfied. Therefore, the financial strength of the company and its principals together with experience of the company in satisfying similar purchase orders becomes more important when deciding to approve a purchase order funding request.
Q: My bank already has a lien on all my receivables. Can purchase order funding be gotten in this situation?
A: Maybe. It will be necessary to obtain a subordination agreement with your bank on that portion of the receivables generated as a result of the purchase order funding transaction.
Q: What transaction size will will you consider for purchase order funding?
A: The range for standalone purchase order transactions is about $250,000 to $2,000,000. The minimum for recurring purchase order transactions is about $50,000 per month.
Q: How much will you advance on the purchase order?
A: The amount that will be advanced on the purchase order will be the minimum required to get the order to an invoiceable state. For example, for finished goods, the advance would be the amount required to buy the goods from your supplier and might also include the cost of freight, insurance, and inspections.
Q: In what form will the purchase order funding payment be made?
A: The purchase order funding payment can be made in the following ways.
- Check
- Wire transfer
- ACH
- Letter of credit (usually used on international transactions)
Q: How is the purchase order funding advance paid back?
A: The purchase order funding advance may be paid back in the following ways.
- Proceeds from a letter of credit to your company from your customer stating payment will be made when goods are delivered
- Accounts receivable financing of the invoice that is presented when the goods are delivered to your customer
- Purchase by a leasing company when the goods are delivered to your customer
Q: What documents will you need to see as part of the application for purchase order funding?
A:The following documents will need to be provided along with a completed application form. However, please do not provide these documents until requested to do so as part of the application process.
- Copies of Articles of Incorporation and By Laws
- Copy of Fictitious Name Filing (if applicable)
- Copy of Partnership Agreement (if applicable)
- Financial statements
- Schedule of aged accounts receivable
- Copy of 941 withholding tax filings & proof of payment
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