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Purchase Order Financing - Easy Money
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According to Dictionary.com, the word easy is defined by 17 definitions. The most pertinent definitions include:
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"1. Not hard or difficult; 6. Not burdensome or oppressive; 7. Not difficult to influence or overcome; 11. Not tight or constricting; 14. In commerce it means not difficult to obtain." In this article,"easy money is meant to convey the idea that, despite these difficult times in 2008 , when money is scarce and difficult to acquire, under certain circumstances , a business that sells its products to other businesses could easily gain money that will allow it to grow exponentially.
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On this planet, mankind has not invented money for hundreds of years. As nation states and civilizations evolved, people learned to barter and trade things they needed. Money was invented to help solve the problem of bartering. It was mostly an issue of timing between farmers using their crops to exchange for their desired goods in the moment they needed it. The invention and acceptance of gold and silver coins helped to overcome the timing issue. The farmer was able to sell his crop for gold and trade gold, when needed, for other items they needed.
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Paper money was invented to serve a multitude of purposes and not the least of which is to eliminate the burden of carrying a large quantity of silver or gold. Paper money is more convenient to hide. Until the early 1900's during the United States paper money could be exchanged for gold. In the Great Depression, President Roosevelt in 1933 passed laws outlawing the ownership of more that $100 of gold by individuals. At the turn of the century then, that was when the U.S. government discovered easy money. Free of the need for physical gold reserves the printing presses of the federal government could pump out however much money as they wanted; and politicians invented schemes such as the selling of government bonds, government loans of various kinds, and control of the supply of money through the twelve regional Federal Reserve Banks to manage the country's economic system and the money supply.
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Our government's easy money fact , is costing each American an extremely high cost. When the world economy recognizes that our currency is worth less and we pay more for imports , such as gas, clothes and food. If you travel to Europe for example we discover that it takes about one and one-half U.S. dollars to purchase just one Euro, the currency of Europe. In essence, European hotels restaurant, food items, and services cost fifty percent more for Americans due to the weakening in the dollar. However, U.S. musicians make more money in Europe than they can make in America since it is less expensive to pay them "in dollars". In spite of this economic environment many U.S. businesses are innovative and creative, and are ready to expand at a rapid pace. Purchase Order Financing can be the easy money solution to the demands of rapid growth.
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Why does it work? Purchase order financing can solve the issue of timing when you pay a supplier for goods before the buyer is able to pay the seller for the product , similar to how gold and paper money solved the issue of barter timing mismatch. An example of this in the real world is the one of a business that has developed popular products for dogs and cats. Their customers were mostly small-scale stores. They received a massive order from a major box store , which would almost triple their revenue on the basis of a monthly basis. The business was not able to raise the cash to fulfill the order. Purchase order financing offered how to address their liquidity problems to cover the cost of the manufacturing of the product and to send the goods to the big box customer.
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How does it work? A credit letter is issued to the company to assure payment. The price of goods is paid to the manufacturer as soon as the goods are delivered, as in the case above, to the big box retailer. An account receivable financing arrangement is designed to pay for the purchase order as well as the letter of credit side of the purchase. When the buyer makes payment on the accounts receivable, the loaner, usually a finance business or bank subsidiary, is made payable in accordance with the contract and the earnings are returned back to the buyer.
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Why is it easy money? Since the credit of the seller is not the main criteria to secure the financing. The buyers credit is utilized to secure the financing. Still the quality of character and experience are essential for lenders. During the due diligence process lenders have to verify whether prior UCC-1 liens exist with respect to the company. If there are major concerns with credit such as bankruptcy, the approval of a bankruptcy court for the debtor currently in possession would be required. In these kinds of circumstances, the debtor will not typically be approved by an Bank however the financing is still quite easy to get, if you consider the circumstances. And it is available if there are virtually no limits to the amount of capital. As the company expands, so to will the finance facility expand as long that the purchase orders come from reliable, creditworthy businesses.
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