Most people tend to think of and measure cash flow solely in terms of the timely collecting of receivables. The company then typically uses the receivable as collateral for some sort of financing (i.e., working capital lines of credit, direct sales to a factor, etc.).

There is a prior step offering a readily available source for internal financing - immediate access to capital from existing invoices or purchase orders. This financing provides your firm with the money in order for you to perform an invoice or contract requirement before it becomes a receivable.

Transaction financing provides typically 100% funding based on qualified pre-shipment documents, purchase orders, invoices, and/or contracts, even for international or export/import transactions. The quality of the transaction and its support documentation becomes the determining factor in the deal, not the balance sheet or income statement of your company.

With transaction or purchase order
financing, the level of funding is
primarily geared to the quality
of the underlying sale, not the
overall financial position of the borrower. Early stage, mature and start up companies use PO funding. In each case, the company has successfully marketed its goods or services, and has a bona fide sale lined up with the buyer. The only missing link is the financing needed to complete the order.

Commercial banks are not prepared to fund these types of high-risk endeavors. Since there is as yet no receivable, factoring is not a financing alternative. Supplier financing, absent a track record of sales of sufficient magnitude or frequency, will either not be present and inadequate. In fact, the need for immediate financing help often arises because the supplier has reduced or changed the terms of supplier financing. The unfortunate result is that the company has a solid contract/sales opportunity and no way to perform due to lack of financing. In a distribution situation, the lack of financing can kill the business.

With transaction or purchase order financing, the level of funding is primarily geared to the quality of the underlying sale, not the overall financial position of the borrower. The quality of the sale and the creditworthiness of the buyer are the prime factors of risk to be considered ingiving your firm 100% financing including related shipment costs. If delivery and acceptance of the goods or products depend on fabrication, assembly, or some other additions by your firm, then the track record of your company in successfully attaining delivery, acceptance, and payment must also be considered.

Typically, transaction financing provides 60-90 days short-term funding (usually at some cap per transaction), often up to 100% payment to the supplier of the products. This in turn allows the company to complete and satisfy the contract with immediate delivery and performance to the client.

Fees or costs to the financing source for this funding may be in the form of an initial charge and/or monthly discount from the proceeds of the sale. The cost rate for that discount may vary by transaction based on how long within the 60-90 day period it takes to get full payment from your client and the perceived risks as to payment for the financing.

From the owner/CEO perspective, access to purchase order funding (used either singularly or in conjunction with other sources) can literally be the key to real and sustained business success. It can result in larger sales opportunities, faster growth potential, stable cash flow, and increased profits. Most importantly, it builds a solid track record of sales and profitability - both key ingredients for banking and supplier confidence.