Purchase Order Finance (BUSINESS BORROWING BASICS 2018)

Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.
2

THE NEW YORK
INSTITUTE OF
CREDIT(NYIC)
SERIES CO-PRODUCER
The New York Institute of Credit (NYIC) was
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The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional
advice. You should consult with an attorney or other appropriate
professional to determine what may be best for your individual
needs. While Financial Poise™ takes reasonable steps to ensure
that information it publishes is accurate, Financial Poise™ makes
no guaranty in this regard.
DISCLAIMER
5

MEET THE FACULTY
MODERATOR:
Christopher Cahill Lowis & Gellen LLP
PANELISTS:
Jason M. Goldberg IDB Bank
Paul Schuldiner Rosenthal & Rosenthal
Richard Simon Mandelbaum Salsburg P.C.
6

ABOUT THIS WEBINAR
Purchase-order financing (P/O financing) is designed to extend credit to a company that needs cash quickly, to fill
a customer order. A company may operate with such a small amount of working capital that it cannot afford to pay
the for the cost of producing a customer’s order. P/O financing enables such company to not turn away business,
by borrowing from a lender using the purchase order itself as collateral to support a loan.
This webinar explains when P/O financing may make sense for a company; some of the more common terms and
conditions of such financing; how to negotiate those terms; how it co-exists with other forms of financing and
potential alternatives.
This webinar is delivered in Plain English, understandable to you even if you do not have a background in the
subject. It brings you into an engaging, even sometimes humorous, conversation designed to entertain as it teaches.
And, it is specifically designed to be viewed as a stand-alone webinar, meaning that you do not have to view the
other webinars in the series to get a lot out of it.
7

ABOUT THIS SERIES
Many companies, and most of any size, use borrowed funds as part of their capital structure. Depending on the
nature of the business, its size, time in business, whether it has adequate collateral, and other factors, a business has
myriad options when borrowing funds.
This webinar series provides a guided tour of the various borrowing options available to businesses, from both a
business and legal perspective. Major topics covered include asset-based lending, P/O Finance, Factoring,
Merchant Cash Advances, and Market Place Lending / Fintech. Learn the advantages and disadvantages of each,
tricks of the trade when negotiating these arrangements, and more!
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors,
business owners, and executives without much background in these areas, yet is also valuable to attorneys,
accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings
you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the
series is designed to be viewed independently of the other episodes, so that participants will enhance their
knowledge of this area whether they attend one, some, or all episodes.
8

Dates shown are premiere dates; all episodes will be available on demand after
their premiere date.
EPISODES IN THIS SERIES
EPISODE #1 Understanding the Lending Landscape 1/17/2018
EPISODE #2 Asset-Based Lending 2/21/2018
EPISODE #3 Purchase Order Finance 3/21/2018
EPISODE #4 Factoring 4/18/2018
EPISODE #5 Merchant Cash Advance 5/23/2018
EPISODE #6 Market Place Lending / Fintech 6/20/2018
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Episode #3 Purchase Order Finance

PURCHASE ORDER FINANCING – A
SPECIALTY ASSET-BASED LOAN
1. Short-term transactional financing that allows a company to purchase
raw materials or finished goods for known sales opportunities
2. Equity alternative for companies that want to achieve sales and profits
that would otherwise be unattainable without diluting ownership or
losing operational control
3. Put another way: Bridge financing that works in concert with a
company’s existing financing facility (i.e., ABL, factoring, traditional
lines of credit, etc.)
11© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™

PURCHASE ORDER FINANCING – A
SPECIALTY ASSET-BASED LOAN (CONT.)
a. Example of a PO financing transaction:
i. Company X receives a large PO from customer
ii. X’s supplier needs to be paid up front, but X’s customer won’t pay
X’s invoice until 60-90 days after it receives goods from X
iii. Creates a classic working capital gap: without money, X risks losing
the order and customer confidence
iv. Enter a PO financier, who has cash and can pay X’s supplier
directly, bridging the gap and facilitating the sale

WHO COMMONLY USES PO FINANCING?
1. Distributors
2. Wholesalers & Distributors
3. Resellers
4. Importers or Exporters of finished goods
5. Outsourced manufacturers
6. Light manufacturer or Assembly businesses

PO FINANCING-THE PLAYERS
a. Client/ “Borrower” (business in need of cash)
b. Factor
c. PO financier
d. Supplier
e. Customer

PO FINANCING FROM THE BORROWER’S
PERSPECTIVE
1. Customer sends
PO to Borrower
2. Borrower
creates PO to its
Supplier, realizes
it can't afford to
purchase goods
from Supplier
3. Borrower
applies to PO
Financier for
Financing
4. PO Financier
conducts due
diligence & agrees
to fund under
financing
agreement
5. PO Financier
pays Borrower's
Supplier directly
6. Supplier
delivers goods to
Borrower
7. Borrower fulfills
order to Customer
8(a). Customer
remits payment to
PO Financier
8(b). Borrower
assigns sales
invoices to Factor
9. Factor pays PO
financier
10. PO Financier
remits payment
net of fees under
financing
agreement
SOURCE:
http://www.factoring-
invoices.com/purcha
se-order-financing-
cycle/

PO FINANCING VS. TRADITIONAL BANK
LOAN
a. Traditional lender will impose strict loan requirements
b. Unlike a traditional lender, PO financier advances funds for the
purchase of goods or inventory–not a loan–focusing on Borrower’s
customers’ credit, rather than Borrower itself
c. PO financier may assume risk of nonpayment by customers
i. Dependent on whether factoring is recourse or nonrecourse

PO FINANCING VS. AR FACTORING/INVOICE
FACTORING
1. Accounts Receivable (“AR”) factoring or Invoice factoring are similar
concepts to PO financing but are different in several key ways
2. AR factoring is a lending transaction under which the lender (AKA
“Factor”) lends funds to a borrower for a percentage of the borrower’s
already invoiced accounts receivable

PO FINANCING VS. AR FACTORING/INVOICE
FACTORING (CONT.)
3. AR factoring does not take place until after goods have been provided to a
borrower’s customer and an account receivable has been created
4. PO financing occurs before a borrower has paid its supplier and fulfilled
customer order
5. A/R factoring does not consider Borrower’s customers’ creditor after the
delivery.
© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 18

PO FINANCING MECHANICS
1. Borrower receives PO from customer, but Borrower does not have
sufficient working capital to pay its supplier/vendor to fill the order
2. Should the Borrower reject the order? No – it has options

PO FINANCING MECHANICS - OVERVIEW
1. Borrower reaches out to PO financier & submits financing application
2. PO financier conducts due diligence & verifies PO
3. PO financier pays the supplier for the goods the business needs to fulfill
the purchase order
4. PO financier collects payment directly from Borrower’s customer by
factors of invoices or advance collected funds and Borrower is paid the
difference less fees.

MECHANICS – LOGISTICS OF THE
TRANSACTION
1. PO Financier will require borrowing applicant to be financially transparent,
and at minimum submit the following during a full application period —
a) PO from customer
b) Supplier invoice
c) Borrower’s PO to the supplier
d) Information on profits on transactions
e) Borrower business history
f) Borrower balance sheet and income statement
g) Customer credit information
2. Once application submitted, PO financier will determine whether to fund

MECHANICS –LOGISTICS OF
THE TRANSACTION
(CONT.)
Sample Purchase Order Form
Source: https://www.accountingcoach.com/balance-sheet/explanation/4

MECHANICS –
LOGISTICS OF THE
TRANSACTION (CONT.)
Sample Business Balance Sheet
Source: https://www.vertex42.com/ExcelTemplates/excel-
purchase-order.html

MECHANICS – FUNDING MECHANISMS
1. PO financier will perform due diligence to determine whether
Borrower is a good candidate
2. Due diligence includes investigating Borrower’s financial statements and
other information to ensure orders will be fulfilled upon funding
3. PO financier will also investigate supplier to ensure delivery of goods to
Borrower

(CONT.)
1. PO financier will also analyze creditworthiness of Borrower’s customer
involved in the transaction
2. Likelihood of funding heavily influenced by probability of customer paying
in a timely manner

(CONT.)
3. Product Quality control is key!
1. Quality control of goods subject to PO financing is essential to
ensure a supplier’s conformance with contractual requirements
necessary for a satisfactory transaction
2. PO financing usually requires inspection certificate by acceptable
independent third-party inspection company. Charges for the
inspection are borne by the borrower since they will negotiate the
rates directly with the inspection company

(CONT.)
1. PO financing companies tend to accept either straight resale or
light production transactions for pre-sold goods
2. PO will likely need to have profit margin of at least 20% and be
non-cancelable
3. PO also cannot be for consignment/guaranteed sale
4. Most financing sources only handle transactions of a minimum
size

(CONT.)
1. Typical steps leading to successful PO financing
(a) Letters of Credit
(b) Documentary Collections
(c) Purchase Guarantees
(d) Cash on delivery or cash in advance

COST OF PO FINANCING
1. Costs differ based on transaction, terms of advance, and other
circumstances
2. Financing rates typically based on “utilized funds” (outstanding funds
needed to pay suppliers)
1. Example:
1. Borrower owes supplier $50,000, so PO financier’s borrowing
rates will be based on $50,000 transaction size.

COST OF PO FINANCING (CONT.)
1. Examples of PO financing borrowing fees:
1. 1.25% - 3% per 30 days – pro rata on a daily basis after day 30 until
repaid

COST OF PO FINANCING (CONT.)
1. Fees for PO Financing are high if comparison to traditional lenders
2. But by comparison traditional lenders will not typically provide the
same type of financing, unless willing to provide overadvance
3. Compared to other options, PO Financing may actually be much
“cheaper”:
1. raising equity (permanent, requires ceding share of business)
2. mezzanine debt (potentially more costly relative to absolute cost,
including warrants, amortization, etc.)

ADVANTAGES OF PO FINANCING
1. Borrower able to fulfill customer orders quickly without using its own
capital or going cash flow negative
2. Useful to startups, seasonal businesses, or businesses with inconsistent
cash flow
1. It can also benefit established company pursuing larger sales

ADVANTAGES OF PO FINANCING (CONT.)
1. Can facilitate ability to service large jobs/sales, fueling growth
2. Flexible–adapts to Borrower’s business cycle & size of orders financed
3. Borrower doesn’t need to have excellent credit because PO financier
focuses on customers’ credit
4. Easier to obtain that institutional bank lending

DISADVANTAGES OF PO FINANCING
1. High borrowing fees (in comparison to traditional financing)
2. Borrower should have sufficient profits or incremental sales to benefit
3. Borrower’s suppliers must accept a letter of credit, purchase guarantee,
or cash;
4. More difficult to underwrite for manufacturers or businesses assembling
on site.
5. Funds generally used only to pay suppliers (not operating expenses).

SENIOR SECURED LENDER CONSIDERATIONS/
FACTOR CONSIDERATIONS
1. Client’s Customer Credit
2. Transactions Considerations (LC discrepancies)
3. Aging and Collateral considerations
4. Segregation of Inventory
5. To Lend or Not to Lend: Financial Considerations

DISTINCT LEGAL ISSUES
1. POF – True assignment and transfer of ownership (buyer/Seller) or
loan (lender/borrower)
2. Intercreditor and Subordination Agreements – establishment of relative
priority in split collateral, as well as payment. Segregation or specific
identification of collateral of PO Funder relative to a Traditional
Lender, a Factor of A/R only and a Factor who over advances based in
reliance of inventory or makes inventory advances

DISTINCT LEGAL ISSUES (CONT.)
3. Discretionary Letters of Credit – Discrepancies as a sword as opposed
to a shield, obligation to timely respond to discrepancies, issues
arising from document review by corresponding bank or Pacific
Rim Branch of Global Bank, necessity of obtaining original
documents
4. Vendor issues with inspection companies, insurers and necessity
for proper coverage and protection for POFs

TIPS & GUIDELINES
1. Borrowers should select a PO financing company based on its industry
experience and capital sources, as well as transaction flexibility, costs,
and minimums
2. Shop around for the right PO financier

ABOUT THE FACULTY
Christopher Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen LLP, in
Chicago. He advises businesses on relationships with vendors, customers, and lenders, to maximize market
share, return, and liquidity. He also litigates on behalf of secured creditors, trade creditors, and in chapter
11 cases and advised more generally on corporate restructuring, including workouts, loan forbearance,
assignments for the benefit of creditors, UCC Article 9 foreclosure sales, and avoidance litigation.
Mr. Cahill also publishes and speaks frequently on commercial insolvency and commercial transaction
issues. He is an Executive Editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland,
Elizabeth Vandesteeg & Christopher M. Cahill eds., 2017), a comprehensive treatise that is updated
annually and published by Thomson Reuters. In addition, Mr. Cahill is the host of Financial Poise Radio, a
weekly interview and commentary podcast for investors and other market participants, with 100 episodes
and counting.
CHRISTOPHER CAHILL
ccahill@lowis-gellen.com

ABOUT THE FACULTY
Jason M. Goldberg is Senior Vice President, Division Head of IDB Factors, a division of Israel Discount Bank of New
York. Jason brings over 20 years of executive leadership, credit and supply chain expertise within the consumer products
industry to the Bank. Based in New York, Jason manages IDB Bank’s national factoring operation, with a focus on
middle market businesses in the Fashion, Apparel, Furniture, Home Furnishings and Textiles, Consumer Electronics
and Food and Beverage, industries. Jason joined IDB Bank in October of 2015. Prior to joining IDB, Jason was Senior
Vice President - Managing Director of Trade Services for Crestmark Bank, managing The Bank’s national consumer
products finance platform. Jason also has extensive experience within retail customer credit markets.
Jason began his career as a collector for a family owned and operated factoring company and has held positions
throughout his career in Operations, Customer Credit, Portfolio Management, Account Management, Business
Development, Sales Management and P&L Management.
Mr. Goldberg is a member of the CFA, IFA, and the TMA. Mr. Goldberg received his BS in Political Science from
Binghamton University, Harper College. Mr. Goldberg lives in Englewood NJ with his wife and three children.
JASON M. GOLDBERG
jgoldberg@idbny.com

ABOUT THE FACULTY
Paul D. Schuldiner is Senior Vice President at Rosenthal & Rosenthal, a commercial finance company specializing in factoring and
asset based lending. Paul leads the firm’s newest division, Rosenthal Trade Capital, and is responsible for driving the overall business
strategy for Rosenthal’s purchase order financing and alternative inventory financing solutions. Paul is a seasoned financial executive
with over 20 years of experience in the purchase order and trade finance business and has previously held senior leadership roles at
King Trade Capital, and as a principal of Transcap Trade Finance . In addition to purchase order financing, Paul started his career in
the asset-based lending division of a NYC based finance company and practiced as a CPA in public accounting. Paul received his
Bachelor’s degree in Accounting from Queens College, City University of New York.
Paul has been featured in Women’s Wear Daily, Entrepreneur, TIME, Forbes and Bobbin Magazine and has authored articles for
The Commercial Factor, The Secured Lender and ABF Journal. He has been a featured speaker and panelist at a number of national
and regional industry seminars and conferences, including TMA Mid-Atlantic & Mid-America, CFA’s Factoring & Supply Chain
Finance World and Annual Conference.
Paul is currently the President of the IFA’s Northeast Chapter, the Chair of the New Jersey State Society of CPA’s Cooperation with
Bankers committee, and on the Board of Directors of the New Jersey Chapter of the Commercial Finance Association and the New
Jersey Chapter of the Turnaround Management Association.
PAUL D. SCHULDINER
PSchuldiner@rosenthalinc.com

ABOUT THE FACULTY
RICHARD SIMON
rsimon@lawfirm.ms
Richard Simon has been practicing law for over 30 years and has extensive experience in commercial litigation, and
commercial, industrial, trade and purchase order finance. Richard spent 10 years as a principal and the general counsel to
a trade finance company with an emphasis on asset-based lending, factoring and purchase order funding. During this time
he was responsible for all legal affairs, the purchase order funding operations and oversight of corporate compliance.
At Mandelbaum Salsburg P.C., Richard established the firm’s asset-based lending, middle market, factoring and trade
finance practice which currently represents banks and non-institutional lenders, factors and borrowers in both loan
negotiation, documentation and restructuring transactions. Throughout his career he has acted as outside general counsel,
advising clients on a myriad of issues confronting midsize to large businesses on a daily basis, including business structure,
planning, finance, compliance and contract matters.

The material in this presentation is for general educational
purposes only.
It has been prepared primarily for attorneys and accountants for
use in the pursuit of their continuing legal education and continuing
professional education.
IMPORTANT NOTES

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About Financial Poise™
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DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
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Purchase Order Finance (BUSINESS BORROWING BASICS 2018)

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