Purchase Order Financing: A Little Known Funding Option

screen capture of Midland American site

Midland American Capital’s website.

I have written about purchase order financing before and discuss it in my book, The Funding Is Out There!. Purchase order financing is not as readily available as business owners would like, but it is available. Today and Friday I share a two-part interview with Carolyn McClure, Senior Vice President Business Development Officer (Midwest Region) of Midland American Capital, which is one of the few purchase order financing firms in the U.S. and Canada.

Tiffany: First, what is purchase order (PO) financing?

Carolyn: Purchase order funding is an advance on your customer’s purchase order in which the funds advanced are used to purchase inventory. This inventory is tied to the specific purchase order for a specific customer and is not used to purchase general inventory for sale at a later date. The PO financing firm pays the supplier directly and collects payment from your end customer. In collecting payment directly from the end customer instead of you, the PO financing firm’s client, the PO financing firm steps into the role of an invoice factoring firm.

 

Tiffany: How does it work?

Carolyn: Funds to cover the cost of goods are wired from the purchase order financing company directly to the company’s supplier. Funds can also be released via a letter of credit or via cash against documents (more on this later). The PO funding company requires a copy of your customer’s purchase order with your company as well as a copy of the purchase order your company signed with your supplier. The PO funding company releases funds on an order by order basis.

The PO funding company is paid back via factoring once the inventory is delivered and has converted into a receivable. This means that the PO funding company collects the funds directly from the billed customer; it does not wait for you, the client, to receive payment and then pay the PO funding company.

 

Examples

(Note, in the examples below, the “client” is the company that obtains funding from the PO funding company, the “customer” is the company the “client” has the purchase order with, the “supplier” is the company that manufactures or supplies the product for delivery to the “customer” on behalf of the “client”. The “customer” may also be referred to as the “buyer”.

 

Carolyn: Example: Simple Fulfillment

Simple PO graphicThe client sells a well-known product, which is not subject to rejection for quality and will be drop shipped directly from a well-known supplier to a well-known end customer/buyer. The funding company pays the supplier for the product and tracks that inventory to the customer. This is the simplest transaction, but the funding company needs to see some history between the client and the customer via repeat orders.

Upon receipt of the merchandise by the customer, the funding company converts the PO into a receivable and factors the invoice.

Simple purchase order transaction

Carolyn: A More Complicated Example

The well-known products are sent to the client’s warehouse for sorting and packaging and then shipped to multiple customers. In this case, the funding company would need to trust that the client can perform this relatively simple task. The PO funding company also needs to understand how it could step in and take over these tasks if the client failed to perform.

More complicated PO funding example

Tiffany: Why is purchase order financing so difficult to find?

Carolyn: I saw many PO funding companies go out of business during the recession of 2008. Some lost their funding while others decided to opt out. Keep in mind that many U.S. businesses were forced into liquidation and, as a result, the funding companies had to sell off the excess inventory, sometimes at a loss. Many lenders steered away from inventory as they dealt with liquidation issues.

Tiffany: Tell me about Midland American Capital. 

Carolyn: Midland offers purchase order funding & AR (accounts receivable) factoring to small and medium sized businesses throughout the U.S. and Canada. We have offices in California, Illinois, Nevada, Massachusetts, Florida, and New York. Our program has no monthly minimums, no originals needed for funding and no termination fees. We WILL consider 60 and up to 90 day pay, milestone billing / work in progress, annual service contracts and government AR.

Tiffany: What are the criteria to access purchase order financing from Midland American Capital?

Carolyn: Our PO financing program caters towards clients looking to fund between $600,000 to $24,000,000 annually. Depending on the complexity of the transaction, we may require years in business but we have funded companies with as little as 3 months of history. We never want to be the first order out of the gate and we like to see that the owner has some ‘skin in the game’. PO funding lends itself to any company looking to purchase inventory. We cannot factor Medicare, Medicaid or private insurers, construction, Jewels and precious metals, commissions, pay when paid, guaranteed or consignment sales.

Tiffany: Any additional?

Carolyn: If Midland is not a fit for your business or you need a product that we do not offer, I will gladly refer you to a different lender. My contact information is below.

Join us the next time for more examples from Carolyn and more details on the differences between purchase order financing, letters of credit, and AR financing.

About Carolyn McClure: Carolyn McClure is a dedicated Business Development Officer with over 16 years of experience in leasing, factoring and purchase order financing. Carolyn is a tireless networker, an avid supporter of small business and minority groups, and is constantly striving to provide personalized working capital to growing businesses. Contact her at Toll Free) 800.753.3300 Cell) 312.543.8976 Fax) 312.212.5958, email cmcclure@midlandamericancapital.com