Purchase Order Financing Rates

Transaction Structure

Here is how a purchase order financing transaction is commonly structured. Let’s assume that you are a distributor and your customer has placed a purchase order with you to buy $100 worth of widgets. Let’s also assume that your supplier charges you $50 for those widgets.
Additionally, your supplier wants you to prepay that $50, but your company does not have the capital to pay for the goods in advance of delivery. This is where purchase order financing comes in. The financing company can help you complete this sale by structuring the following transaction (assuming you have a financing contract in place):

  1. The purchase order financing company reviews the transaction to ensure that it complies with the funding requirements.
  2. The purchase order financing company pays $50 to your supplier directly. Depending on the circumstances, payment may be made by letter of credit or by wire transfer.
  3. Once the payment has been received, your supplier manufactures/releases the widgets.
  4. The widgets are delivered to the customer, who inspects and accepts them.
  5. At this point you can invoice your customer. The transaction can proceed in one of two ways. You can factor the invoice and use the factoring proceeds to pay the purchase order financing company and close that line. The transaction would then proceed as a conventional factoring transaction. Alternatively, if factoring is not an option, the transaction can settle once your customer pays for the end goods.

When it comes to purchase order financing rates, the risk associated with every transaction is different. Rates generally vary from 2-4% of the amount being advanced to the supplier (in the case above, that would be 2-4% of the $50 that was advanced to the supplier/manufacturer.

Lower Your Rates Even More

Business owners sometimes get confused at point #5 above. Why bring in a factoring company? The reason is simple: combining purchase order financing with factoring through the same financier often yields a lower total transaction cost for the PO financing portion than if you were using purchase order financing alone because the factoring company is handling the entire process. They will give better purchase order financing rates on transactions where factoring will also be in play. However, given the fluid nature of these transactions, you should double-check the numbers to make sure that combining factoring and purchase order financing is the best solution for your transaction.

Want to know more?