Pre Shipment or Purchase Order Finance– can anyone Deliver the Goods? – Part I

The talk about supply chain finance and in particular new ways of financing commercial transactions, be they international or domestic, has mostly just been that, talk. Almost all of the developments we hear around vendors, networks, and early payment revolve around post shipment , approved invoice financing, what I call the easy stuff.

If suppliers waited to get funded until the invoice was approved, many small suppliers (and potentially even some larger ones!) would have cash flow challenges and difficulty obtaining further financing. How would they order raw materials? Or pay contract labor? Finding ways to finance deeper in the supply chain, off of purchase orders or materials ordered, is much more difficult.

When it comes to purchase order finance, every deal is different, and there are numerous variations depending on the supply chain and scenarios one is attempting to finance. For example,

A distributor may manufacture overseas and have the goods drop shipped directly to their customer via their overseas supplier. The goods are produced, packaged and ready for delivery to the client’s customer by the factory/supplier overseas. The order is completely fulfilled by the overseas supplier. As a funder, will the client’s customer pay? Will the factory producing the goods and third party logistics firm fulfill their duties? And how much trust can we put into the overseas supplier?

A completely different scenario exists when a domestic client is producing the goods. Since purchase order financing provides only direct costs in fulfilling the order, here the focus is on understanding the proven history of not only producing the product but also the ability to cover non-direct costs with cash flow. Purchase order financing can include the cost of materials, parts and direct labor to fulfill the order.

So as we see, this type of financing is hard work, and very bespoke. So where technology vendors and their approaches here?  Tomorrow, I will briefly cover two that purport to offer solutions here: SWIFT's Bank Payment Obligation and GT Nexus and their export finance solution.

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