Over the years, we have fielded many calls from consultants inquiring about Purchase Order Funding opportunities (PO Funding). These types of prospects seem to garner a great deal of excitement as most prospects looking for PO Funding are in dire need of cash, and they need it now. Therefore, anytime they find someone that is interested in providing them with the funds for these types of transactions, they are typically very motivated to move forward. The problem is; these are very difficult deals to get funded – let me explain why:
First, let’s define the differences between Factoring and PO Funding.
Factoring: The purchase of business to business INVOICES (or ACCOUNTS RECEIVABLE) at a discount for services rendered or products delivered
PO Funding: The advance of cash against a PURCHASE ORDER or CONTRACT so the client can source the product or the raw materials needed to create a product, in an effort to deliver to the end user. In some cases, PO Funding is needed to hire employees or source equipment needed to fulfill a contract.
As you can see from the definitions, Factoring involves funding AFTER performance of an obligation and PO Funding requires funding PRIOR to performance.
Ok, so, now put your funding hat on – would you advance money to a client and HOPE they end up performing so you can get paid back? Or, would you prefer to fund them after they have performed? Ask yourself these questions:
- If I advance my client the money and the very next day they go out of business, will I get paid?
- How can I be assured that they will perform?
- Does the client have enough money to pay me back in the event that they are unable to perform?
- What happens if the end user (debtor) cancels the order after I have advanced the money?
Certainly, there are more questions to ask, but, I think you get the point.
So, with that said, why do funding sources offer PO Funding? Well, we offer this in certain situations. First, we would never provide PO Funding for a service contract, nor, would we provide PO Funding when the money is needed to purchase raw materials. We do provide PO Funding when the transaction involves the purchasing of finished goods. Let me give you an example:
Our client is in the Apparel business. The client receives a Purchase Order from a large retail outfit (lets say Macy’s) for 1,000 Silk Shirts. Our client needs to source the shirts from a manufacturer in China. China refuses to ship the product until they receive a Letter of Credit or Cash. Millennium is approached with this opportunity. Millennium provides the letter of credit needed and China ships the shirts directly to Macy’s. Our client creates an invoice to Macy’s and Millennium now factors the invoice.
To summarize, when you are approached with a potential PO Funding opportunity, ask the client the following questions:
- Is the funding needed to source finished goods? – if the answer is no, no deal
- Do you have a history of managing these types of transactions – again, ask yourself if you would fund someone that is doing this for the first time?
- Do you have any current outstanding Accounts Receivables (Invoices) that my funding source could finance against as extra security – if they don’t, most funding sources will run away.
In conclusion, many times prospects feel they need PO Funding when all they really need to do is factor their current invoices to free up the cash needed to pay suppliers. Ask the right questions and you will save a great deal of time and energy in the future.
Timothy J. Sardinia – Mr. Sardinia is currently a Partner with Canfield Capital Management, LLC, a Member of Steelkilt, LLC, a Member of Millennium Automotive Group, a Member of Millennium Legal Funding. Tim can be reached at tim@millenniumfunding.com or by calling 716-204-4800.
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