Can a Purchase Order Loan Keep Your Business Growing?

Looking at a client's credit score or if his business is completely underwater," says Richard Eitelberg, founder and president at purchase-order lender Hartsko Financial Services in New York. "We look only at the transaction we're financing."

If the borrower's big customer has good credit, the P.O. lender delivers a letter of credit to the manufacturer that guarantees payment for the needed goods. The factory then makes the products, and a third party verifies that the order is complete. The factory gets paid and ships the goods off, usually to a third-party warehouse. It's rare for the borrower to receive the goods--they're usually shipped straight to the customer.

When the bill's paid, the funds go to the P.O. lender, which subtracts its fee and sends the remaining profits to the borrower. Without revealing what he charges, Eitelberg says Hartsko doesn't make a loan unless the product has at least a 30 percent margin, so as to leave enough room for the small business to still make a meaningful profit.

If the borrower has given the big customer payment terms of 60 or 90 days, often another type of specialty lender, known as a factor lender, comes into the picture to provide immediate payment to the P.O. lender. The factor lender buys the outstanding invoice at a discount and then waits and collects the full amount owed later, pocketing a profit in the process. Meanwhile, the P.O. lender and the small business get paid immediately. Factoring adds another cost but may be required by the P.O. lender.

Until recently, there were only a handful of active purchase-order lending companies nationwide, but that's starting to change. New companies are springing up, and some lenders who provide factor loans are branching out into P.O. lending. For instance, factor lender Factors Southwest in Phoenix recently expanded to offer P.O. lending to its existing clients after seeing strong customer interest, managing member Robyn Barrett says.

Some P.O. lenders are also getting more flexible on how much risk they are willing to shoulder in a P.O. loan. At 20-year-old Maryland company CTRL Systems, CEO Robert Roche says he found a P.O. lender (ECAP LLC in White Plains, N.Y.) willing to finance the manufacture of components for the company's ultrasound-diagnostic equipment. CTRL then takes delivery of and assembles the ultrasound machines at its own factory in Maryland.

CTRL turned to P.O. loans after seeing sales and cash flow decline, then begin growing again, leaving the company cash-strapped. The company has done two separate P.O. loans to cover component manufacturing costs, Roche says, each time borrowing less than $100,000.

"This relationship with the P.O. lender gives us the confidence that we can go out and secure significant new business and fulfill those orders," he says.

Factors Southwest's Barrett says she advises clients to consider other finance options--including liquidating assets--before turning to P.O. loans. But if there's nothing else available, a P.O. loan can keep a company growing. Says Barrett, "Use it as a last resort."

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