This short article will help you understand the differences between these two financing solutions.
Purchase Order FinancingThis product has been very well covered in this blog. You can find a description here and read this article about it's value proposition. But in summary, it helps resellers that have received a large purchase order and don't have enough money to fulfil it. PO funding provides the financing to pay your vendors and deliver your product.
However, this financing solution has very specific qualification requirements. For example, you can only qualify for this product if the following apply to your company:
- You have a large purchase order from a credit worthy client
- You resell finished goods and don't manufacture your own products
- You use a single supplier for your product
- Your sale does not include services
- Your profit margins are above 30%
The problem is that many companies don't resell completely finished goods. Instead, they get parts from a number of suppliers and perform light assembly to finish the product. Which brings us to the second problem. These orders require more than one supplier. These two criteria often derail many po financing transactions.
Production finance is similar to po funding with the exception that it can provide financing to companies that perform light assembly (or manufacturing) and use multiple vendors. Companies that provide this solution are willing to take on "manufacturing risk", basically the risk that something could go wrong with the manufacturing process.
Manufacturing risk is an important risk factor because it leaves the purchase order finance company in a challenging position. They could end up in a position where they have paid your suppliers, but won't be able to recover their investment because the final product was not assembled to acceptable standards. Because of this, companies that offer this solution are very selective and the product is often more expensive than conventional purchase orderr finance.
In general, production finance companies want to work with companies that: