What is PO Funding (And Why Should I Care)?

While Factoring provides funding to a client on the generation of an invoice for the sale of goods or services at the time of the sale, Purchase Order Funding (“PO Funding”) provides the client with the funding required to pay his supplier for the purchase of inventory prior to the subsequent sale to a committed and credit-worthy customer.

tractor-1450745-639x426Let’s take an example: A client of Aberdeen involved in the purchase of small farm implements and equipment from various local suppliers and the distribution of these tools and equipment to farms across the country was having difficulty growing as they could not access either credit from their suppliers (a relatively new business, our client) nor the working capital necessary to pay cash for this inventory. Realizing that help of this nature would be a win-win situation for both client and Aberdeen, we decided to use our funds to buy the inventory, which would then be drop-shipped to the farms.

Ok, so some of you may remember reading that little story or some variation of it before, but WE NOW provide this service OURSELVES. WE DON’T “FARM” IT OUT TO ANOTHER COMPANY!

So, we are sent the invoices from the supplier by our client for these items, validating thereby that they have a customer waiting for these items, we pay the supplier via ACH or Wire Transfer and Voila, another shipment of equipment to help feed the hungry masses is on its way to some lonely corn field in Iowa or the new organic Apricot farm in sun-dried California (the State, silly, not the Apricots). Now, realize something: When we factor an invoice, that invoice is our collateral, our property. When we pay for the supplies, that inventory belongs to Aberdeen until the farm receives them and we have a proper invoice in substitution. So, this is the nub of the matter regarding the additional risk involved in PO Funding; have you ever heard of a finance company that knows how to sell farm equipment? NO! So, we have to make sure everything is on the up and up. The last thing we want to have happen is that yours truly is schlepping around the country in his beat up old Ford truck trying to find farmers in their Harvesters ( or whatever it is they use – tractors?) who want to buy some agricultural gizmo whose function is pure mystery to my financial brain. Hey, I know what a plow does, I can recognize a shovel (spade?), but anything else? Well, I never did go to agricultural college.

Before I lose your interest, I guess you want to know “So what’s the big deal, doing it yourself?” Well, as you know Aberdeen’s philosophy is to build partnerships with its clients. We do business on a personal basis. We are not some huge corporation to whom its clients are just numbers…so that means the more we can do for our clients, the better our relationship becomes. Not to mention that doing it ourselves means that, because we are also factoring your invoices, we can charge you much less for the PO Funding than the specialist company down the road…..Ha! That got your interest, didn’t it? Anything to save a Buck – and I commend you for your financial perspicacity.

shovel-pick-axe-1205959-638x424Let’s understand a couple of other things about PO Funding. It becomes really difficult to enjoy this type of funding if you are in the manufacturing business, for example. In this case, you would want us to buy lots of little widgets and stuff that have to be assembled to make your product. Now, if you think it’s difficult selling farm implements, how much more difficult is it to sell all these little chutskes should we buy them for you and you don’t use them to assemble the finished product for some reason? How do we recover our money if the finished product doesn’t ship? Ugh. This is awful. The risk has just gone up exponentially. Frankly, there is no rate of return that is worth that kind of risk, so you’re up a creek in this type of situation. Sorry. And yes, I know you can say there is little chance of that happening, but you go argue with the Risk Underwriters. They have no sense of humor, they love statistics –great combination, but how dull.

So, last step in the PO Funding process. Our client invoices the customer, we, now acting in the Factoring role do our due diligence (remember how we have to verify delivery?) and then advance the invoice advance rate (say 80% of the face value of the invoice), minus the funds we paid to your supplier plus this fee. When setting up this kind of funding, there are 2 parties involved, apart from the Supplier and the customer: the PO/Factoring company (us, of course), and the client. Real cozy.

So, there is a PO Funding agreement (one page and separate from the Factoring Agreement) between Aberdeen Funding and the client and that’s it. Real simple. All in-house.

The advantage of this type of financing, to repeat an old lesson, is that a company short of working capital, but endowed with skilled management, a great product and credit-worthy customers, can use these characteristics to obtain funding easily and grow. Banks will not fund this kind of situation and why should one give up an interest in one’s business to an outside investor in order to raise capital? Most of us want to keep what we own and build and only accept outside stockholding when the options are limited. Another advantage is that with the ability to pay for product immediately, the client might be able to negotiate quick payment discounts with its suppliers. By paying immediately, client becomes a “most favored nation” and can expect to be high on the list of favorite customers of the producer should there be a shortage of available product. Also, the discounts so negotiated can, in many cases, more than compensate for the cost of capital the client incurs.

If you’ve read this far and are interested, give me a call or shoot me an email. I’m waiting.

Share and Enjoy:
  • Facebook
  • Twitter
  • Google Bookmarks
  • LinkedIn