If you are looking for a purchase order financing company, you have probably figured out that the market is saturated with companies that claim to offer this service. However, only a few of them have what it takes to successfully handle these transactions. Since the company plays a vital role in the outcome of your transaction, it’s critical to choose the right one.
At first glance, purchase order transactions seem pretty simple. However, they are not. Many times, these transactions have contingencies attached to them, including schedules, quality requirements, and other conditions. All of these are a critical part of the transaction. You need to work with someone that understands this and who can apply the most appropriate financial structure.
When you are looking for the right PO financing company, you need to be asking the following questions:
Is PO Financing their focus- or is it a “side” service that they offer?
Many times, a factoring company will advertise that they “also” offer purchase order financing services. Most of the time, these companies primarily focus on factoring and only handle a handful of PO financing transactions each year. The truth is, they offer PO financing for a few clients and to obtain larger factoring transactions.
While this might work if the transaction is small, easy, and not strategic, it will not work in typical PO financing transactions because they are often more complex and require an expert touch. If you don’t work with an expert, the transaction could fall apart, which risks your entire portfolio. If the transaction is large, strategic, and/or complex, you’re better off working with a company that has a trade finance department.
Have they dealt with transactions in your industry?
Make sure that you choose a company that has some experience in your industry- or at least a similar one. Additionally, if you work with larger corporate clients, you’ll want to work with a PO financing company that has worked with those clients in the past. Most larger companies have complex purchase agreements, so it’s best to work with someone familiar with them.
Do they use letters of credit to pay suppliers?
One of the safest transaction methods is to pay suppliers with letters of credit. This means that many of the finance companies will only deal with transactions with suppliers who accept letters of credit as payment. However, most suppliers are not comfortable with this because letters of credit can be complicated. Which makes it hard to get paid.
Ideally, you should choose a company that is comfortable putting cash against documents or paying via wire transfer after inspection and shipment. Keep in mind that typically letters of credit are used to pay foreign suppliers.
How do they deal with deposit payments?
Most of the time, foreign suppliers require a deposit to be made before they start to work on an order. Since prepayments increase the risk of a transaction, things get complicated in this case. Therefore, many of the finance companies will not make prepayments.
That being said, there are some ways to handle these payments. Therefore, make sure to ask the finance company how they handle prepayments to make sure that you are comfortable with their methods.
How do they deal with guaranteed payment clauses?
Many times, a contract from a large corporate client will include a guaranteed payment clause that allows the client to return unsold inventory for a full refund. Many companies that sell products on television include these clauses in their contract. However, these clauses can be detrimental to your transactions.
There are some ways that you can negotiate better terms with your clients to decrease your risk. If these clauses are part of your order, make sure that you choose a company with experience in this area.
How long have they been doing business?
While this really should go without saying, you must ask a PO financing company how long they have been in business. Choose one that has been in business for at least 2 years- longer, if possible. This is a growing field and there are constantly new companies coming onto the scene. Therefore, many lack the necessary experience and have not proven themselves.
If you require a PO financing company, contact Crimson Stone Capital Solutions and we will help you determine what you need.