Purchase Order Financing in Canada – Working Capital and Cash Flow for your Canadian orders and contracts!

P O FINANCING

Purchase Order Financing in Canada - Many Canadian business owners and financials managers continue to hear about this alternative financing vehicle, but are unclear as to how 'P.O. FINANCING ' works, and what the benefits are. They also ask themselves if they would qualify for such a financing..?

When business owners and financial manager's think of fulfilling large new purchase orders and contracts they tend to focus on utilizing financing they currently have in place - normally that's a bank line of credit or perhaps a factoring or receivable discounting facility with an independent finance firm. But what happens when your current financing facilities are not able to handle the cash flow needs you have in conjunction with large new orders or contracts. You might want to arrange a ' bulge facility with your bank, but quite often this is not possible. We ask readers to call to mind something that finance people call the ' Sustainable Growth Model – it's a calculation you can make which effectively calculates how much your firm can grow without additional financing . At a certain point you need that additional financing to fulfill orders / contracts.

So how does the business owner get cash flow for the new orders / contracts? That's where P O financing comes into place. Many Canadian companies are not even aware of the existence of this type of facility.

P.O. Financing is essentially the payment to your firm, in advance for materials and labor involved in order for you to facilitate the order or contract - It's that simple!

Does your firm qualify as a P O financing recipient?

There are some basic criteria involved so let's look at them -

1. Your end user customer must be credit worthy - naturally financing can't be advanced on your P O or contract if you do not have a viable customer at the other end of your order. It is their payment to your firm that wills satisfy the purchase order financing. This bring to mind the key point in P O financing, which is simply that its a short term temporary working capital and cash flow strategy . It is not ' term financing '.

Naturally all business financing in Canada is ' secured ' - in the case of purchase order financing the security is the P O itself and the resultant receivable that it creates when you're firm satisfied and fulfills the order. If you have a secured senior lender in place they will be required to acknowledge the P O financing strategy, because technically they have security on the order, although they of course aren't providing the financing. We have observed with firms that we have worked with that, generally speaking, PO financing works best with firms who do not currently have a senior lender - i.e. bank, etc.

In certain cases, more often than not, you may be asked to provide additional collateral or guarantees on the order, although in a ' perfect' PO financing the security is simply the PO.

Many business owners don't realize you need fairly solid gross margins to successfully enter into a purchase order financing arrangement. That is simply because your order or contract has to cover: Cost of goods, labor, overhead, PO financing costs, and, we hope... profit left for your firm when all is completed! So firms in commodity based industries with low margins aren't often the best candidates for PO financing.

Why does PO financing work and have benefits for your firm? Quite simply it's because it provides you with the capital you otherwise might not have been able to obtain to fulfill large orders and contracts - your company becomes more competitive by having successfully completed larger orders and contracts, and additional profits and revenue flow thru to the bottom line.

If you feel your Canadian firm could benefit from such an innovative financing mechanism such as purchase order financing speak to a trusted, experienced and credible advisor in this area.

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