Purchase Order Financing

Purchase order financing or production financing

Purchase order financing works for companies that have purchase orders from their customers but don’t have sufficient funds to produce or procure the goods or services being sold and thus seek financing usually from a factoring company to get said funds.

In purchase order financing a company usually has an ongoing relationship with their Customer or has sold the same goods in the past. The factoring company usually looks for previous trade experience between your company and your Customer.

In other cases if the goods are produce by a third party and dropped shipped directly to the final buyer, the factoring company will evaluate the reputation of the manufacturing party to make sure that the goods they are producing will be satisfactory to the end buyer. In this case, the factoring company will pay the goods to the manufacturer and once the final buyer pays for those goods under their terms, the factoring company will give to the Client its margin in the transaction.

For example: A client in the US lands a contract to supply an order for safety railing to be used in road construction in Panama. The company that is buying the safety railing is a large multinational corporation doing work for the government locally and they need railing that is produced under us DOT regulations in the US. The payment terms are 30 days after receipt. The order is large and the manufacturing company in the US does not give payment terms to our Client. The client asks us for PO (Purchase order) financing so that we pay the US supplier and wait until we get paid from the Panama Company. In this example, our client has a 16% margin between the purchase price and the sell price, so once Summar collects the payment from the Panama Corporation, we will discount our investment (payment to the US supplier) plus our fees and give the remainder to the Client. This way the client was able to secure a transaction using zero capital of his own.

This is international purchase order financing.