| Investorwords: "Purchase Order is a written authorization for a supplier to ship products at a specified price, which becomes a legally binding contract once the supplier accepts it. The form will contain all purchasing information such as price, quantity and details of delivery." (credit: investorwords.com) |
Purchase Order Finance is a financial tool which permits an undercapitalized or fast-growing company to expand its business beyond what a traditional lender can support. The entrepreneur is able to do this primarily because of the strength of a confirmed purchase order from a credit worthy customer rather than the size of the company's balance sheet, or the availability of external collateral.
Funding the purchase of finished goods is the most common form of Purchase Order Finance. Generally speaking, this transactional form of finance follows a set of procedures, which when followed, should lead to a Win/Win situation for the client and the financier. These procedures are:
1. The client obtains a confirmed purchase order from a credit approved customer. Most of the purchase orders call for open account terms, but occasionally the customer issues a letter of credit to the client to enhance the transaction.
2. The client places a purchase order with his manufacturer/supplier (foreign or domestic).
3. STAR evaluates the structure of the proposed transaction.
4. When satisfied with the transaction's structure, STAR opens a letter of credit to the supplier.
Click for the rest of the steps in the process...
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