You might find it surprising that a company that offers purchase order financing is writing an article about why this solution may not be for you. The fact is that we get a number of prospects that want this type of financing, but don’t necessarily understand how it works or who it helps. This is in part because the name – purchase order financing – is fairly generic, appealing and sounds all-encompassing. This short article will help you understand who is a good candidate for this solution and who is not.
Let’s start with a simple explanation of purchase order financing. It helps re-sellers and distributors that have received a large purchase order from a customer and need funding to be able to fulfill it. One key detail is that PO financing can only be used by companies that are reselling third party products. This means that they must buy the goods from a third-party and resell them to the customer (at a markup) without any modifications or customization. This last point is very important.
With this in mind, this solution may not be for you if:
- You manufacture goods at your own facility
- You buy goods and then do minor changes
- You buy goods from different suppliers and then assemble them into a final product at your facility
- You sell finished goods, but then need to install and customize them at your clients facility
However, our product may be for you if:
- You buy goods from a third-party supplier
- You resell those goods (without modification) to credit worthy corporate or governmental customers
- Your profit margins are about 20%
Purchase order financing provides a number of benefits for companies to qualify for it. The most important one is that they will be able to take on larger orders that exceed their existing funding capabilities. Additionally, they will be able to take on orders from new customers and expand their companies.
It is very common to use this product in combination with factoring financing. Usually the po funding component will cover financing the transaction from the point at which you have to pay your supplier to the point at which delivery is made to the customer. Once a delivery is made, you can issue an invoice and factor it. Part of the factoring proceeds can be used to pay down and close the purchase order finance line, at which point the transaction goes forward as a invoice financing transaction.
The transaction closes when the end customer pays. Usually combining both products leads to a lower total transaction cost. However, this varies and may not always be the case, so you should always check these numbers with a knowledgeable professional before you engage in a transaction.