EDC Financing Purchase Order Contract Purchase Order Financing Canada 7 Park Avenue Financial

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Purchase Order Financing Canada 101!  PO Financing & Inventory Finance Solutions
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What is Purchase Order Financing?


The need for PO Financing is often viewed as a good news / bad news scenario.  Your firm has the ability to receive customer orders or contracts but you are challenged with restrictions or unavailability of inventory and PO (purchase order) financing. Growing your business and financing a business based on assets such as inventory and orders in coming in has never been more of a challenge in Canada.

Benefits of PO Finance

The key benefit of purchase order contract finance is your ability to fulfill orders that might not have been made given finance limitations. That allows a business to grow and generate additional profits. The ability to fill your client order with no serious cash flow implications to your day to day operations is key.


When we speak to clients we advise there is no one method that seems to handle all inventory and PO finance challenges. But the good news is that via a variety of effective business financing tools you can employ you are in a position to generate working capital and cash flow from these two asset categories.


Let’s examine some real world strategies that have made sense for clients. The attractiveness of this type of business finance is that it can be accessed quickly, typically in days, not months! The root of the problem is simple, you have orders and contracts, but those will potentially be lost to a competitor. Conventional wisdom is that you go to your bank and ask for financing to support inventory and purchase orders.


As you may have experienced, we aren’t big believers in conventional wisdom on that matter! However, utilizing a conventional purchase order funding source does allow you to purchase a product and get your suppliers paid, thus facilitating your ability to deliver to your customers. In some cases, more established firms may wish to consider EDC financing via the Government Crown Corporation, typically for international sales.


One of the main benefits that many clients don’t realize in purchase order finance is that inventory financing and purchase order contract financing doesn't necessarily require your firm to have a long or strong credit history; the focus on structuring the transaction is around the inventory being financing and the general creditworthiness of your client, who will be paying yourself or the inventory or PO financing firm

How Does Purchase Order Financing Work

The overall process is fairly simple and easy to understand when it comes to putting the transaction together successfully. On receipt of your confirmed purchase order, your supplier is paid via cash or a letter of credit. Your firm of course completes the final shipment of the product, which typically involves some additional time on your firm's part. To qualify, your firm must be able to prove you have a creditworthy supplier and customer.

Because Purchase Order Finance is a more expensive form of financing, you should ensure you have healthy gross margins in order to absorb the financing cost; that should typically be at least in the 15-20% range. The transaction should always be a B2B (Business to Business) sale. Government purchase orders and contracts can be financed also! It is safe to say that goods must be tangible in nature. On shipment and of course payment from your customer the transaction is in effect settled. In a true pure PO financing scenario, the PO funder is paid immediately on your invoicing of the product. That is facilitated by your firm selling the receivable via a factoring type transaction as soon as you have generated the invoice.


This type of financing works best when it can assist a smaller firm to increase revenues when normal cash flows can’t finance these sales. Smaller businesses obtaining large orders get immediate access to working capital. Many fast-growing businesses come to a point where sales outpace incoming revenues, leaving them without enough cash flow on hand to cover operating expenses or new orders. PO financing and invoice factoring help small businesses stabilize their cash flows and gain access to working capital.

There are always limitations to this type of financing - so things we look for early in the transaction are the ultimate remarket ability of your product in case there is a transaction risk. Naturally, as we stated, the overall creditworthiness of your customer is key, his receipt of goods and payment in effect closes the transaction.


Inventory financing and PO financing are generally more expensive than traditional financing, due mainly to the significant transaction risk that the lender takes. Therefore we strongly recommend that your firm has solid gross margins in the 25% range to cover the associated costs of a PO financing, inventory financing transaction that also factors in the time it takes to get paid by your client, as that typically adds 30-60 days on to the whole cycle of the transaction.

What Comes First? Invoice or Purchase Order

There is a key difference between purchase order financing and invoice factoring/invoice discounting, but both have the same goal in site, ensure you can cash flow your business revenues. Financing the receivable happens after you have sold your goods, the PO process is of course prior to the sale.


One of the best ways to ensure the maximum financing of your sales, POs and contracts is to consider an asset based line of credit for cash flow needs. Coupled with a facility that will finance your purchase orders this is the ultimate working capital tool that will allow you to grow business quickly and significantly. This type of facility is generally a non-bank facility and is offered by independent finance firms.


Speak to a trusted, credible and experienced Canadian business financing advisor and financing company with a track record of finance success who will assist you in putting together a working capital and cash flow solution that works!

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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil