Purchase-order funding provides instant cash

Most people tend to measure cash flow solely in terms of the timely collecting of receivables. The company then typically uses the receivables as collateral for some sort of financing, such as working capital lines of credit.

There is another choice – immediate access to capital from existing invoices or purchase orders – that offers a readily available source for internal financing.

Transaction financing typically provides 100 percent funding based on qualified pre-shipment documents, purchase orders, invoices, and/or contracts, even for international or export/import transactions. The quality of the transaction and its support documentation become the determining factor in the deal, not the balance sheet or the company’s income statement.

Mature, early stage and start-up companies use purchase-order funding. In each case, the company has successfully marketed its goods or services and has a bona fide sale lined up with the buyer. The only missing link is the financing needed to complete the order.

Commercial banks are not prepared to fund these types of high-risk endeavors. Since there is as yet no receivable, factoring, or accounts receivable financing, is not an alternative.

Supplier financing, absent a track record of sales of sufficient magnitude or frequency, will either not be present or will be inadequate. In fact, the need for immediate financing help often arises because the supplier has reduced or changed the terms of supplier financing. The unfortunate result is that the company has a solid contract/sales opportunity and no way to perform due to lack of financing. In a distribution situation, the lack of financing can kill the business.

With transaction or purchase-order financing, the level of funding is primarily geared to the quality of the underlying sale, not the overall financial position of the borrower. The quality of the sale and the creditworthiness of the buyer are the prime risk factors to be considered in giving your firm 100 percent financing, including related shipment costs. If delivery and acceptance of the goods or products depend on fabrication, assembly, or some other additions by your firm, then the track record of your company in successfully attaining delivery, acceptance and payment also must be considered.

Typically, transaction financing provides 60 to 90 days of short-term funding (usually at some cap per transaction), often up to 100 percent payment to the supplier of the products. This in turn allows the company to complete and satisfy the contract with immediate delivery and performance to the client.

Fees or costs to the financing source for this funding may be in the form of an initial charge and/or monthly discount from the proceeds of the sale. The cost rate for that discount may vary by transaction based on how long within the 60- to 90-day period it takes to get full payment from the client and the perceived risks as to payment for the financing.

From the owner/CEO perspective, access to this type of financing (used either singularly or in conjunction with other sources) can literally be the key to real and sustained business success. It can result in larger sales opportunities, faster growth potential, stable cash flow and increased profits. Most importantly, it builds a solid track record of sales and profitability – both key ingredients for banking and supplier confidence.

Kent Harlan, CPA, is owner of Ozarks Capital Funding. He can be reached at www.ocflink.com.