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How Purchase Order Financing is used for International Trade

Purchase Order (PO) finance is an option for garnering funds for a business that requires assistance in completing a large purchase order, as defined by Investopedia. Every company dreams of landing a large order that launches their company to the next level of success. Ideally, they will be able to fulfill this order and reap the rewards. However, reality is often quite different. The order may be so big they are unable to fulfill it with their working capital. For example, a mid-level company may receive an order that would normally be suited for a large corporation. This mid-level company does not have enough capital on hand to order enough materials to fulfill the order, or perhaps not even have the manpower to handle it. With PO financing, this mid-level company seeks funding or a Letter of Credit from a PO financial company, which is then used to fulfill the purchase orders. The Wall Street Journal found that this type of lending has been increasing every year as companies start to see it as a viable option to gain more working capital. This general process is also how purchase order financing is used for international trade.

How Does Purchase Order Financing Work?

Each PO financing company has their own unique requirements and processes for how the PO financing process will transpire. 1st Commercial Credit, a purchase order financing company, has the following process that can be used as a general guideline for the PO financing process:

  • A company that is a manufacturer or distributor of goods recognizes the need for additional funds in order to fulfill a purchase order.
  • The company in need seeks out a PO financing company and completes an application.
  • The application is reviewed and approved or denied.

Factors that are taken into account for approval are:

  • How long the requesting business has been in operation. Generally, one year is the minimum.
  • The requesting business must have previous transactions that were successfully completed with the same client, or similar clients.
  • The order must reach a minimum dollar amount. Each PO financing company has a different minimum amount. 
  • The order must be from a credit worthy client.
  • Some companies also require the company be based in the U.S.
  • If the application is approved, either a Letter of Credit or funds are released to the applicant.  Letters of Credit are generally used for distributors that receive goods from a supplier. The Letter of Credit is given to the supplier and guarantees them payment upon completion of the purchase order. Funds may be given to manufacturers of goods to allow them to purchase materials or increase their manpower.
  • Once the purchase order is fulfilled, if a Letter of Credit is used, the payment is issued directly to the PO finance company. The company then transfers funds to the requesting company, less their fee. If funds were released, they are repaid with a predetermined fee.

The above process may vary by each PO financing company. However, it can be considered an accurate outline of what a company can expect from the PO finance process.

How Is It Used for International Trade?

Dan Casey, contributing financial expert for the Washington Post, suggests the primary use of international PO financing is in the import/export sector. Import/export companies generally deal exclusively with large purchase orders from suppliers that go to international customers. An importer/exporter constantly has capital tied up in purchase orders and invoices, fulfilling multiple orders at the same time. With PO financing, these companies are able to fulfill as many international orders as they receive.

International PO financing is not limited to the import/export industry. Any manufacturer or distributor that ships internationally and meets the PO financial company’s requirements may take advantage of PO financing. The process for an international PO financing request is essentially identical to the process detailed above. The only additional steps taken will be in regard to verifying the credit worthiness of the international client, which can require more steps than a domestic client.

PO Financing Can Help You Grow Internationally

You can use PO financing to grow your business, both domestically and internationally. It can help leverage the credit of your clients and your transaction history to be able to process more international orders and expand your business. This also helps bring your company into the global market.