Use Case – Purchase Order Funding
A reader recently asked for us to do a Use Case – Purchase Order Funding can be done for an International Transaction using a typical scenario to demonstrate how it fits together.
Use Case – Purchase Order Funding Players:
|Manufacturer Company Name: Ryerson Machineworx Manufacturer
Location: Chattanooga TN USA
Age of Company: 1.5 years
Yearly Sales: 1.2 million USD
|Broker Company Name: Francois Intermédiaires
Broker Location: Marseille France
Age of Company: 2 years
Yearly Sales: 5.2 million USD
|End Buyer Company Name: Group Teknext
End Buyer Location: Antwerp Belgium
Age of Company: 5 years
Yearly Sales: 3.2 million USD
Use Case – Purchase Order Funding Scenario:
To begin, Ryerson Machineworx is a company that manufactures machinery products for manufacturing plants. In other words, they are a machine shop to create machinery that other companies use to produce or manufacture parts.
They have been operating on investor funds since the company started. A company called Francois Intermédiaires from France has contacted them about purchasing $1 million USD worth of their goods. The France Company has a sales agreement to sell the goods to a company in Belgium for $1.3 million USD and wish to facilitate the sale and they are looking to procure the product from Ryerson.
Consequently, none of the companies have done business together previously but all have done similar business with other parties.
Terms of Sale:
End Buyer: Full payment 30 days after delivery and acceptance.
Manufacturer: Requires payment assurance upon order confirmation and full payment upon delivery and acceptance to customer.
Use Case – Purchase Order Funding Solution:
A Purchase Order Facility can be put together in order to accomplish the following:
|1. First of all, set up an Accounts Receivable Factoring line with Francois Intermédiaires so an advance of $1 million USD will be made available upon delivery of the shipment to Group Teknext.|
|2. Assignment notice is made to Group Teknext advising them the invoice is to be paid to the Commercial Finance Company.|
|3. Provide a Letter of Credit in the amount of $1 million USD as payment assurance to Ryerson Machineworx.|
|4. Delivery is made to Group Teknext by Ryerson Machineworx.|
|5. Once delivery has been accepted by Group Teknext, Francois Intermédiaires issues the $1.3 million USD invoice to Group Teknext.|
|6. An advance of $1 million USD is made against the outstanding receivable of Group Teknext.|
|7. The advance is then used to pay invoice to Ryerson Machineworx their invoice amount of $1 million USD.|
|8. The invoice to Group Teknext by Francois Intermédiaires is paid to the Commercial Finance Company when due.|
|9. Finally, the Commercial Finance Company deducts the amount paid out to Ryerson Machineworx and forwards the difference to Francois Intermédiaires less the agreed upon finance fees.|
Keep in Mind: Use Case – Purchase Order Funding
This is not the only way to structure the successful completion of the transaction, however is it a typical way to do it. There are several other ways to put together the transaction based on the various factors that come into play in such transactions.
The number one most important things, more so that creditworthy customers is that the facilitator, or in the given example Francois Intermédiaires, must be able to show an “Audit Trail” that they have successfully orchestrated similar transactions. If it cannot be demonstrated that the company organizing the transaction has not done similar transactions in the past, this will most likely negate the possibility of doing a Purchase Order transaction in the shown manner.
In conclusion, when an Audit Trail is not available, it may be possible to do the transaction with a liquid fund contribution by the facilitator so they will have “skin in the game”.
Find out your options, talk to one of our Commercial Finance Professionals today by going to IMMFinancial.com. Commercial Financing to suit the needs of Your Business.
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