Purchase order financing has been gaining popularity as a way to finance resellers and distributors that have large purchase orders but lack the capital to fulfill them. It is is specifically designed to help resellers that do not manufacture products directly but buy third-party products and resell them for a profit. To qualify for purchase order funding your company should meet the following criteria:
1. It must have a purchase order from a credit worthy commercial/governmental customer
This is perhaps the most important requirement since the invoice that is generated from a successful delivery of the product is the collateral for the transaction. Because of this, the customer that issued the purchase order must be a commercial or governmental entity that has good credit. Also, the purchase order must be noncancelable and not be for a guaranteed/consignment sale.
2. You must sell finished goods
Purchase order financing can only be used by companies that are reselling finished goods that were bought from third parties. Additionally, they must sell these goods without any assembly, customization, or modifications. Unfortunately, companies that do direct manufacturing will not qualify for this solution. However, companies that use third party manufacturing facilities and act as intermediaries may be able to qualify.
3. You must work with reputable suppliers
Your company must work with reputable suppliers, which is critical for the success of the transaction. Your suppliers must have a track record of producing the goods you are buying and must be in reasonably good financial shape. It’s fairly common for companies to try and get purchase order funding because their suppliers are having financial problems and are requesting prepayments. Unfortunately, these transactions seldom qualify. However, financing purchase orders will help you if your supplier is requesting prepayments because your company has not established a credit history with them.
4. It must have gross margins of at least 20%. Higher is obviously better.
Due to its inherent risk, purchase order funding transactions are more costly than more conventional business financing products. Because of this, they work best when the gross margins for the transaction are a minimum of 20%, though 30% is preferred.
Obviously, this is a simplified list of qualification requirements but actually covers the most common reasons why factoring companies decline PO funding transactions. Making sure that your company meets this criteria will help ensure that you have a higher chance of success.