Purchase Order Financing in the Financial Spectrum

Purchase order financing becomes necessary when a bank cannot satisfy a borrower’s total financing requirements. Typically this occurs when there is a need for more funds than the bank cares to make available because of financial deterioration, or conversely when a company is simply growing too fast. If a borrower were able to obtain the necessary capital through its bank, transaction capital, or purchase order financing would not be needed. Because primary lenders generally measure credit worthiness in terms of operating trends, liquidity ratios, and collateral margins, there are limitations on the amount of credit that can be extended. Transaction lenders, however, are deal oriented, and focus on other criteria, such as the cooperation of a primary lender, the quality of the purchase orders, as well as company management’s ability to run the business, reflected by its past performance, and future expectations. It is this difference in emphasis that creates a natural partnership between a bank and a transaction finance company. Utilizing the services of both permits a borrower to maximize its loan potential. As a result, banks are increasingly looking to transaction financing experts as a source of supplementary financing for their customers.

The relationship between a bank and a transaction specialist is not the basic participation normally associated with a venture between lenders, which typically involves two or more lenders, each providing a portion of the loan while sharing in the collateral. The most significant difference is the increased borrowing power that is made available. Unlike the customary participation, the association between a bank and transaction finance company represent independent efforts of each, working in tandem to maximize the credit facility. Each lender concentrates on what it does best to serve the ultimate interest of the borrower.

Companies that specialize in providing transaction capital secured by purchase orders are considered interim lenders. Funds are made available to accommodate short-term needs until more permanent financial solutions can be found. They are neither competitive with nor an alternative to traditional lending activities. Instead, they offer a supplement to conventional debt, the availability of which enables the user to significantly increase its borrowing power. The introduction of a transaction finance company neither infringes upon the borrower’s relationship with its primary lender, nor does it interfere with the lender’s administration of the loan. Rather, it provides a service that benefits both borrower and lender. Specifically, this complementary source of capital permits the borrower to obtain additional funds up to 100 percent of the cost of needed inventory to pursue opportunities that would otherwise be lost. The corresponding benefit to the principal lender is a potentially more profitable customer and an improved association while incurring no increased risk. In fact, a bank can enhance the relationship with its customer by expanding it to include the services of a transaction finance specialist, to capture an opportunity that would otherwise be lost.

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