Case Study: Purchase Order Financing for a Growing Business

Unique sales opportunities, or seasonal demands often require the assistance of transaction financing. A case in point involved a manufacturer of consumer goods, with an exceptional opportunity to do business with a major retailer. The company received an extremely large order, well beyond its expectations, and production capabilities. To complete the order, the company needed to find an alternative source of product to supplement its production capacity, which would require additional financing. An offshore manufacturer, able to provide product at the desired price points, was found, but insisted upon letters of credit, which involved more assistance than the bank would provide. Additional equity was an option but dilution of ownership at this particular time was neither advisable nor desirable. The market conditions were not right, and the timing of a public offer was premature. The bank was, however, interested in finding a solution to its customer’s temporary problem and offered to increase the credit line to finance the higher accounts receivable levels sure to result from the increased business. In addition, the bank introduced its customer to a transaction lender specializing in purchase order financing. The supplementary financing that was extended enabled the company to acquire the necessary finished inventory off shore, increase sales and profits, as well as establish itself as a reliable vendor to a major customer. In addition, the bank’s decision to expand the relationship with its customer to include the activities of a transaction finance specialist enhanced its own profitability and allowed it to retain a client it could have lost.

Once the validity of the purchase order was confirmed and the necessary documentation received, the letters of credit were issued, and the inventory purchased. Specifically, purchase order financing enabled the borrower to finance100% of the cost of the inventory.

Purchase order financing can play an important role in a variety of situations, from start-ups, to turnaround situations, acquisitions, and the financing of seasonal needs. Whatever the circumstance, candidates for purchase order financing have a common thread, a need to acquire inventory to satisfy outstanding purchase orders from credit worthy customers. While purchase order financiers provide capital to facilitate specific transactions, most relationships involve more than one business deal to fund additional inventory needs.

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