Purchase Order Financing Overview: Purchase order financing is a financing option for resellers or distributors of hard goods that lack the funds to pay their manufacturers. A purchase order represents a firm commitment to buy goods from one of these product resellers or distributors. On the basis of such purchase orders, a purchase order financing company will pay the manufacturer to produce and ship the goods. Once payment is collected from the buyers who signed the purchase orders, the purchase order financing company will be reimbursed for its outlays and collect its fee. Purchase order financing is a variation on factoring that has grown since the 1990s.
Purchase Order Financing Terms and Conditions: According to The New York Times ("The Places They Go When Banks Say No," 1/31/10), a typical purchase order financing loan bears interest at rates in excess of 40% per annum. Rates of 3.5% for the first month and 1.25% for each 10 days thereafter are the usual terms quoted by one representative firm, and 60 days is the usual duration of their loans.
Purchase Order Financing Prevalence: The NYT article indicates that there are perhaps only 6 independent purchase order financing companies of any size currently in operation. Precise statistics are not available. The customer base of these companies is small businesses that are having difficulty obtaining bank loans, even from banks with which they have longstanding relationships. The firm profiled for the article, Hartsko Financial Services, expects its total lending in 2010 to be about $240 million, exactly 4 times its 2007 lending of $60 million.
Some banks do some purchase order financing, but typically only for existing clients. Wells Fargo is mentioned in the article as the only major bank with a dedicated purchase order financing unit.
