Your worst business nightmare just occurred. You got the order/contract! Now what?!
Purchase order financing is a great tool for firms that have unusual purchase order and contract sales financing needs but are potentially unable to access traditional financing via banks or their own capital resources within their firm. How does trade finance P O financing work, does your firm qualify, what are the costs, and how does it work? Great questions, now let’s explore some answers!
Typically Canadian firms looking for this type of financing are distributors, manufacturers, or perhaps wholesalers. A variety of industries in Canada have access to this type of financing, but those certainly tend to be the typical firms needing assistance.
Your need for purchase order financing arises out of what we call the classic working capital gap. What do we mean by that? It’s a case of your suppliers requiring payment either up front or within 30 days, with your firm unable to generate those funds for payment and therefore unable to fill large purchase order and contracts in your favor. Your supplier is asking your for payment in advance or 30 days, and you won’t receive payment for at least 60-90 days, perhaps more depending on your build cycle, etc.
Naturally, you don’t want to turn down orders or lose competitive market position.
The obvious solution for low-cost large amounts of funds are Canadian chartered banks, but our observation is that many firms simply can’t satisfy the bank’s requirements for this type of financing to occur. If your firm is growing, profitable, has a clean balance sheet and strong historical cash flows and history you, of course, have a solid chance of meeting bank requirements, however, that typically is not the case, certainly in a number of clients we talk to who are looking for alternatives to their growth challenge!