Working Capital Financing - Different Types of Purchase Orders

There is no worse feeling as a small business owner then having a job or purchase order in hand (having worked so hard to close these deal) only to find that your business does not have the working capital on hand to actually complete and fulfill that order.

Not only will you lose that order and the profits that come with it, but you will never see that customer again and soil your reputation in the market.

Might be one of the quickest ways to destroy your business and its future livelihood.

Thankfully, there has emerged a form of working capital financing just for businesses in this situation - called Purchase Order Financing.

With job orders in hand, you can factor those orders with a financing company. The financing company essentially advances your business the funding (working capital) it needs to complete those jobs - usually up to 100% of the materials, labor and overhead needed to complete the order.

Then, when the order is completed and you get paid by your customer, you repay the advance and pocket the remaining balance (the revenue above your costs of goods).

Now that you know this working capital financing option is available, the next question is what types of purchase orders can you finance?

First things first: Your purchase orders have to be from a solid company - meaning a company that demonstrates that it can and will pay the full price of the order - a creditworthy company. A purchase order financing company does not want to provide you an advance just to see your customer walk away from the deal due to their lack of funding or capital.

With that in mind, there are essentially four types of purchase orders that are factorable - having the ability to be advanced against.

1) Wholesale / Distributor - These are typically middleman in the entire supply chain. The wholesaler or distributor purchases goods (usually finished goods) in bulk and resells them to end users or customers. Example: Your wholesale or distributor business receives an order for X amount of product. You get this product from a local supplier but don't have the working capital to purchase that product outright. You factor your order, pay the supplier and the supplier either ships the goods to you to be relayed to your customer or the suppliers send the product directly to your customer.

2) Manufacturer - Usually a light manufacturer. Your manufacturing business received a large order for 100 units of your finished product. However, to finish your product, you need 100 frame casings made by your best supplier. You don't have the capital to buy the casing right now and it will take you two weeks after receiving the casing to complete the process and receive payment for your delivered goods. A purchase order financing company could either advance you funds to cover the cost of the casings or provide a letter of credit to your supplier. The letter of credit would ensure that your suppliers get paid when your customers pays you.

3) Importer / Exports - You are importing goods from another country to re-sell here in North America. You have a customer that orders 100 units of your home furnishings for their new construction projects. You can't get your customer to pay enough up front to cover the cost of purchasing those imports. You factor the order to cover the cost, get the goods shipped to you and deliver them to your customers.

For an exporter, it is just the opposite. You receive an order from a foreign buyer for goods that you purchase directly from a near by supplier. You factor that order, receive the goods and ship them to your overseas buyer.

Very similar to a wholesaler or distributor but due to the nature of having an overseas supplier or buyer, most of these orders are handled with both a purchase order and letter of credit to ensure timely delivery and that goods received meet all required standards.

4) Government Orders - Local, state or federal governments are typically some of the largest purchasers of finished and in-processed goods in this country. And, they make very good customers. Though they may take some time to pay, they always pay. And, their purchase orders are usually very precise - ensuring that your delivered goods meet their required standards. Purchase order financing companies love these kinds of deals. Plus, for small businesses looking to expand, having a government entity as a customer is a sure fire way to rapidly grow your company.

The greatest thing about purchase order financing is that it can be done quickly (as long as you ensure that you have orders that can be factored or advanced against).

Plus, they allow small businesses with inadequate working capital to easily complete in hand customer orders as well as to expand or grow their operations by bidding on big jobs - jobs that have eluded them in the past.

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