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Purchase Order Funding A Helpful Option For The Startups

James Darrel

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A choice of procuring short term finances for businesses that require money to fill customer orders at a commission fee is known as purchase order funding (POF). Businesses or trades often face financial crunches at times. It so happens that sometimes there is not sufficient funds to run a business covering all expenses. This would result in un-fulfillment of a cliental order due to insufficient funds hampering the company’s name and certainly a loss of income. And not to mention there might be a possibility of losing the client too. Purchase order signifies a strong assurance of payment of the products bought. On the basis of these orders the funding company issues payment to the manufacturer to fulfill the consignment. On completion of the order and receipt of payment from the end buyer, the funding company is compensated along with their fees/commission.

Mechanism of POF
An article published by New York Times (“The places they go when bank says no” –31stJJanuary 2010) states that the rate of interest on purchase order funding is charged on the higher side which sums upto the tune of 40% annually. The first month is funded amount is charged at 3.5% and then 1.25% consecutively every ten days till the term of the loan which is general confined to not more than 60 days. The sole intention of this funding is not to cover the overheads but for the businesses to pay for the cost of manufacturing their products. However there are certain requirements that have to be fulfilled for the deal to be worked through which are listed as follows: (a) A verifiable signed purchase order (b) An expense report of the estimated cost from manufacturing till delivery to customer (c) An agreement stating the negotiated rate of interest or alternative payment method and reimbursement of loan amount on receipt of payment from the customer. (d) Business and personal guarantee (e) financial loan agreement.
The complete transitional process can be very smooth if all the paperwork is in place and the relation between the parties involved are entrusted.

Prevalence of POF
There is estimated only about 6 designated purchase order funding companies operational in United States according to an article by New York Times. However accurate number is not known. They cater to mainly small businesses that are unable to procure bank loans for some reason or the other. There are no recent statistics available but Hartsko Financial Services in the study based article by NYT estimated their funding business to grow to $ 240 million by end of 2010 which was at $60 mil in 2007. That means it grew by leaps and bounds. A major bank like Wells Fargo also does purchase order funding but they cater to only to their old and known customers as mentioned in the NYT article. The bank has dedicated a separate cell working for this type of funding.

Purchase order funding is a system of procuring finance specially intended to help a business to flourish who do not have sufficient startup funds. Businesses like manufacturing, whole selling, distributing or trading are eligible for these funds. Businesses that get huge seasonal orders can also opt for this type of funding without putting extra burden on the existing business. However it is to be kept in mind that this is a short term solution because of the high interest rates.

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