If you run a business in the manufacturing sector, you know the time it takes to source materials, manufacture the product, ship it and get it on the shelves can be lengthy leaving numerous opportunities for cash stopgaps along the way. This is especially true when dealing with overseas manufacturers and a seasonal line of products. So if you are looking for a way to ensure steady cash flow during the peak and valley times of the manufacturing process, purchase order financing or purchase order factoring may be your answer.
Cover Financial Gaps Related to Production with PO Financing
In Purchase Order Financing, the third-party factoring company guarantees the value of the purchase orders from the buyer that contractually agrees to purchase X number of products the manufacturing company. In other words, the third-party purchase order funding covers the costs associated with transforming those raw materials into the finished goods shipped from the factory.
Because this manufacturing process can take weeks or even months, the delay in time from purchase order to actual sale and delivery of said products can cause all sorts of cash shortage problems. If these issues are left unaddressed, they can delay the manufacturing process itself or, in a worst case scenario situation, cause loss of the customer.
Purchase Order Financing provides the necessary cash to cover this weeks or months gap ensuring factory workers will be paid, materials will be properly sourced, additional equipment (if needed) will be rented for use, etc. Once the order is fulfilled and the products are shipped and delivered, the invoice factoring company will collect what is owed to them and return the remaining dollar amount (minus fees and percentage) to the manufacturing company.
P.O. Funding May Be Worth The Expense, Especially With Overseas Manufacturing
Most invoice factoring companies are familiar with manufacturing factoring and offer competitive purchase order financing rates. Some traditional banks may also offer P.O. funding so it never hurts to shop around. Though purchase order financing can be more expensive than term bank loans, they do not require credit checks or lengthy application underwriting processes. And, if you are working with an overseas manufacturer, they are more accustomed to working with purchase order financing companies so it might make for smoother operations for all involved. Time is money, and more efficient processing might be worth the higher percentage fees.