Examples of Purchase Order Financing


#1 - Importer:
A large retailer wants to buy $250,000 in shirts from an importer. The importer needs to pay his overseas supplier $150,000 in the form of a Letter of Credit. Unfortunately, the importer’s bank has given him a $100,000 credit line.

Solution:
The importer can use the purchase order to finance payment to the supplier. The lender will open a Letter of Credit to the suppler and the shirts will be shipped within 30 days. Once the shirts are delivered to the retailer, the invoice is purchased by lender. The importer receives his profit and moves on to other deals. Retailer remits payment to lender and lender settles up with the importer.


#2 - Importer
A U. S. importer receives a purchase order from a large retailer for $100,000 of shirts. The importer’s supplier in Asia requires a letter of credit for $60,000. The importer cannot go to his bank for the Letter of Credit, because his credit line is at the limit.

Solution:
The importer arranges for Purchase Order Financing and lender issues a Letter of Credit and goods are shipped. 30 days after receipt of shipment, customer remits payment to lender. The lender charges importer between 5% and 10% for the 60 days of cash advance. The importer increases sales and is able to pay down the bank credit line. In the end, importer benefits because he now has sources apart from his bank.


#3 - Distributor
A wholesaler receives a purchase order from a retailer for $100,000 of shoes. The importer has shoes in stock for a cost of $50,000, however, wholesaler only has a $20,000 order limit.

Solution:
The wholesaler arranges for lender to guarantee payment to importer. Shoes are shipped to customer and 30 days after receipt of shipment, customer remits payment to lender. Lender charges wholesaler about 5% for 30 days cash advance.

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