Vendors who provide goods and services to other Businesses or to the Government know they will have unpredictable business cycles. When they are asked to bid on a contract it is usually a situation where they hurry up and bid, and then they sit and wait for the contract to be awarded. Once a contract is awarded, the company can experience rapid growth and will need large amounts of working capital to support that growth.

One option available to improve working capital for vendors who have been awarded large contracts is with Purchase Order Funding. PO Funding provides quick cash flow reserves for manufacturers, importers, exporters, wholesalers and distributors. This type of short-term funding is used to finance the purchase or manufacturing of specific goods that have been presold by the vendor to another Business or to the Government. PO Funding involves issuing letters of credit or by providing funds to pay suppliers. This lets the vendor secure the inventory they need to fulfill customer orders.

PO Funding can be used to:

1. Pay for the cost of goods directly to the supplier.
2. Free up cash for other critical business expenses.
3. Ensure timely deliveries to the customer.
4. Grow without increased bank debt.
5. Ensure that the business does not have to sell equity positions to raise funds.
6. Increase market share with other Businesses or with the Government.

PO Funding for Finished Goods

Finished goods are generally easier to finance when they involve drop shipping transactions. Drop shipping is where the goods go directly from the supplier to the purchaser. The vendor never touches the product or takes direct possession of the product.

PO Funding for Non-finished goods

Funding for non-finished goods is a little harder to get, though not impossible. The vendor will take possession of goods either in a raw state or a semi-finished state. They use the components, or partially assembled parts to make a finished product. The finished product is delivered to the customer.

Quality and Inventory control procedures must be in place to assure the funder that their investment is solid. Funders also need to have the assurance that the customer will accept the delivery of the finished product and not dispute the charges. Many funders will require that a public warehouse be used to ensure inventory control of the product being produced.

Once the product has been ordered and delivered through PO Funding, the funding company will in turn “factor” the accounts receivable invoice. This allows the vendor to have a constant flow of working capital to grow their business and increase the number of contracts awarded.

Benefits of PO Funding

1. Solves the dilemma of suppliers asking for cash on delivery.
2. Frees up cash flow during manufacturing or until the invoices are paid.
3. Ensures the business won’t wipe out its cash reserves.
4. Can be used for a quick response to an immediate sales and delivery need.
5. Offers the opportunity to make additional profit through bonuses awarded for quick delivery.
6. Enables the vendor to meet deadlines more quickly than competitors.

Many vendors who are waiting to be awarded large contracts spend sleepless nights worrying about having the working capital needed to support a new contract. They know that using a bank credit line can be very expensive. If the contract is not awarded, all the bank fees still have to be paid, including standby fees. Now they have the option of using Purchase Order Funding to avoid those issues.

Author: Linda Bayko
Article Source: EzineArticles.com
Provided by: Canada duty

This entry was posted on Saturday, December 12th, 2009 at 1:58 am and is filed under Venture capital. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.