The Advantages of “One Stop” Purchase Order and Accounts Receivable Financing

Most commercial financial transactions follow a well-established process: 

1. A transaction starts with a purchase order, an electronic or paper document issued by the Buyer detailing the amount and specifications of goods it is prepared to purchase.  
2. The Seller accepts the purchase order and completes work on the requested goods. 
3. Upon delivery of the order, the Seller sends an invoice to the Buyer detailing the amount owed and requested payment terms.  
4. Payment is made, completing the transaction.  

Financing is available throughout the transaction cycle. Through purchase order finance (P.O. funding) a commercial finance company helps sellers source supplies and materials necessary to complete an order. Later, once a shipment is made, commercial finance companies provide funding against invoices (invoice discounting or factoring).   

This financial capital can be used for payroll, further purchases, enterprise expansion or to meet any other general business need. Rather than look piecemeal for funding solutions, businesses can benefit greatly by using a one-stop approach to financing throughout the transaction cycle.  

Benefits to combining purchase order financing and factoring with one lender: 

• Harmonizes financing available throughout the production cycle 
• Ensures capital doesn’t become idle or trapped moving from one lender to repay another 
• Ease of administration 
• Consistent, consolidated lender reporting 
• Helps build relationships between the business and lender  

How purchase order financing works: 

• Businesses can receive up to 100% financing for the fulfillment of customer orders. 
• Lenders adjudicate an opportunity based on certain key considerations:  
  • Financial strength of the customer placing the order; 
  • The gross margin embedded in the proposed transaction (generally required to be at least 15%); 
  • The strength of any relationship that may exist between the business and the customer; and 
  • Ease of doing business with the supplier. 
• Funds can only be used for purposes of sourcing the order. 
• The purchase order lender pays the supplier directly. 
• Goods are generally shipped directly from the supplier to the end customer. 
• The lender is paid directly by the end customer. 

How Invoice discounting or factoring works: 

• Businesses can receive 80-95% of an invoice amount upfront upon sale of the invoice to a commercial finance company.  
• The finance company adjudicates an opportunity based on the credit worthiness of the customer (the end debtor). 
• Funds can be used for any general corporate purpose including taxes, payroll, purchasing, etc.  
• The lender is paid directly by the end customer.  

Using more than one financing source can prove problematic: 

• Lack of coordination in setting and keeping workable advance rates in place can undermine the effectiveness of both financing programs. 
• Delays in funding by the invoice discounter can hold up timely retirement of the purchase order advances. 
• An inability of the two institutions to agree on security and priority considerations can raise costly and time-consuming disputes. 
• Lender reporting can prove confusing if it comes from different sources, in different formats or on different days of the month.  

It’s often beneficial for a business to make use of financing that is available along the entire production cycle, from sourcing to sale.  Done properly, this requires that the purchase order financing and invoice discounting work in concert with one another. For example, the advance rates noted above need to be set such that the funding against the invoices is enough to retire the purchase order financing on an ongoing revolving basis once the goods are delivered to the end customer, and funds should move seamlessly from one financing bucket to the other. These and other practical considerations make one-stop shopping solutions from a single lender an attractive proposition.  

How do I qualify/proceed?

Contact eCapital for all your one–stop financing needs, from filling new orders, to carrying clients through extended payment terms. eCapital — the capital you need when you need it.