Case Study: Purchase Order Financing in a Turnaround Situation

A successful distributor found itself losing money. Significant growth over the past two years resulted in over expansion, operating problems, and a modification of the company’s relationship with its lender. Losses required even more financing at a time when the company was entering its peak sales season and on the verge of profitability. Large purchase orders had been received from its present and expanding customer base. Additional financing was urgently needed to acquire inventory to satisfy the purchase orders, but the bank’s aggressive program could no longer be justified due to the previous losses. Instead of a turn down, the bank agreed to continue with its original working capital line, secured by inventory and receivables, and suggested a transaction lender to provide the necessary purchase order financing. Although each of the lenders looked to different assets of the company, the combined efforts of the two is a classic example of the benefits derived from an alliance between bank and transaction finance. The additional capital that was made available through purchase order financing was sufficient to return the company to its former profitability.

Transaction, or purchase order financing is not restricted to the situations above. In fact, this type of financing can be utilized in cooperation with bank debt whenever needs exceed the amount of money that a traditional lender can provide. Unlike a primary lender, the relationship with a purchase order specialist is a short one, bridging the gap between short-term needs and long-term financial solutions. The purchase order financing serves a temporary need, such as when long-term funds may be difficult to obtain, or when a bank feels the need to modify its credit commitments. When this occurs, it is important to consider the benefits of working with this unique and innovative financing source. The borrower gains access to a greater availability of funds without disrupting its relationship with the primary lender, who not only maintains the association with its customer, but also enhances it by finding a solution to satisfy a customer’s total funding requirements.

Providers of purchase order financing have developed operating techniques, and a high level of expertise to operate effectively in today’s global economy. The availability of this resource explains why more and more lenders consider purchase order finance as a valuable supplement to meeting the needs of their customers. It also serves as a means of expanding its own services without additional cost or risk, by utilizing the facilities and capability of transaction finance specialists. As globalization continues and foreign manufacturers expand their position to meet the outsourcing needs of their U.S. customers, purchase order financing will become a more frequent and acceptable source of supplementary financing.

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