Purchase Order Financing: A Key Component to a Successful Turnaround

Rehabilitation, recapitalization, and refinancing are major components to every turnaround, and an often-overlooked key ingredient to maximizing a client’s refinancing potential is a unique concept, purchase order financing, provided by transaction finance companies. This type of lending is perhaps the least understood, but yet one of the more creative means of acquiring additional funds in today’s financial market place. Its availability could provide the necessary capital to convert a client’s potential into performance and therefore a major factor to a successful turnaround.

Purchase order financing is neither competitive with, nor an alternative to traditional lending activities. Instead, it is a supplement to traditional funding and enables the user to significantly increase its borrowing power. The services of a transaction finance company, or as they are commonly referred to, purchase order finance companies, are most often used in conjunction with the activities of a traditional lender to satisfy increased borrowing requirements unavailable from the primary source. This type of financing provides rapid availability of new capital (up to 100% of working capital needs from $250,000 to in excess of $50,000,000) to purchase inventory to fill orders or supply contracts that cannot be funded by the borrower’s standard credit line.

In a typical situation, purchase order financing is used to obtain inventory for the client and upon shipment to the customer, the transaction lender is reimbursed out of advances made by the primary lender against the newly generated accounts receivable. The balance of the proceeds can be used for additional working capital, or to improve the senior lender’s position.

The benefits of purchase order financing are available to manufacturers, wholesalers, importers, assemblers, or distributors in a variety of industries, including consumer goods. The common thread is a need for more funds than a senior lender will make available to acquire inventory, to satisfy outstanding or expected purchase orders. When this occurs, the transaction lender will work with the senior lender and borrower to analyze and structure a comprehensive financial program.

Because senior lenders generally measure credit worthiness in terms of operating trends, liquidity ratios, and collateral margins, there are limits to the amount of credit that can be extended. Purchase order specialists are transaction oriented, and focus on other criteria, such as purchase orders and commitments that can be depended upon. It is this difference in emphasis that creates a natural partnership between two lenders, working together to satisfy a borrower’s total capital requirements.

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