Purchase order funding never seems to work for manufacturing companies. This is why.

Manufacturing has a problem.

Consider the following scenario:

  1. A company places a large order. Great!
  2. Now, all you need to do is to buy resources you need.
  3. You don’t have the funds available right now, but your financial advisor was able to introduce you to a company that can help: They buy the resources you need to fulfill the purchase order for you.
  4. All they need to do is to verify the supplier, the creditworthiness of the buyer, and the terms of the purchase order.
  5. If everything is in order, the company will purchase your product for you and you get to serve that large order.

But, for some reason, this doesn't work for you, a manufacturer.

See, even if you have a great supplier, a more-than-creditworthy customer, and an ironclad purchase agreement in place, it's still not going to be enough.

Purchase order funding providers might sit down with you and consider your business, but they won’t be able to help you.

The reason is simple: Risk management.

Let’s take a look at WHY this is a problem for manufacturing. Once you understand why, you'll have a much easier time finding a solution that does work for you so you don't waste time on other, less optimal, solutions.

Mitigating risk.

In any funding agreement, the party providing the funds will try to limit their exposure as much as possible.

That means that for them, every aspect of the agreement and the participants must be managed and mitigated, or at least identified.

Let's compare the following 2 processes:

Manufacturing

  1. Manufacturer buys supplies according to a contract.
  2. Supplier delivers supplies according to a contract.
  3. Manufacturer works on supplies to produce the final product according to their ability.
  4. Manufacturer delivers final product to their customer according to a contract.
  5. Customer pays the manufacturer according to a contract.

Distributor

  1. Distributor buys supplies according to a contract.
  2. Supplier delivers supplies according to a contract.
  3. Distributor stores supplies temporarily according to their capacity.
  4. Distributor delivers final product to their customer according to a contract.
  5. Customer pays the distributor according to a contract.

Notice the difference between the two at the third step.

Step three describes a core part of the service that is offered to their customers. But there is a significant difference between the two:

COMPLEXITY

For the party that provides the funding, every contract that is in place is enforceable, and the only risk is their client’s ability to fulfill the series of "contracts", including delivery production quality, and other elements.

From their point of view, the less complex that process is the better.

That’s why many will purchase your resources for you instead of letting you handle that part. It provides more control over the process and reduces the number of variables in the total risk equation.

But with manufacturing, the added complexity of the manufacturing process creates a significant problem for most funding parties.

For a non-specialized funder, the added risk is simply too high because they have no way to mitigate that risk.

Does that mean that manufacturers have no options?

Luckily not. But it does mean that the solution needs to be specialized.

The solution.

Solving this comes down to the ability of the party that provides the funding to also understand the manufacturing process and its risks in addition to the rest of the process.

Just like with purchase order funding, the following assets need to be in place and verified:

  1. A purchase order that cannot be cancelled
  2. A creditworthy customer
  3. A supplier with a proven track record

But here, in addition, the following aspects will be considered as well:

  1. The manufacturer’s ability to produce the ordered product
  2. A proven track record of previously produced and delivered products

If these criteria are met, a solution is available: Work in process funding.

The benefit here is that while a manufacturer must be able to fulfill the product and produce it according to the purchase order specifications, work in process funding does not always require that the manufacturer needs to be able to handle the size of the purchase order.

The consequence?

In some cases, the funds can be used to buy the product AND increase the production capacity.

The limitations, terms and other specifics change for every company, but the idea remains: work in process funding is the perfect solution for many manufacturers.

It’s custom, effective, flexible and fast.

If you can reliably manufacture the product, work in process funding is a perfect way to give your company the ability to grow to the next level.

Learn more about work in process funding here and be sure to take a look at a few of our business cases here.

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