In this article, we will cover some of the disadvantages of purchase order financing. This should help you determine if po financing is the right solution for your company. If you need a detailed explanation of the product, please go here to learn what is po finance. In summary, it’s a product that helps re-sellers that have obtained large orders. It provides them with the funds to cover supplier expenses and fulfill large orders. Some common disadvantages include:
- You can only resell finished goods. This is perhaps the biggest disadvantage of po funding – it only works if you resell goods that are not modified by you in any way. This means that your company can’t provide any additional value add services, you must only supply the goods. Unfortunately, this also means that po financing cannot be used if your company is a direct manufacturer of products.
- There must be no assembly. Even you you sell finished goods, your company must not be responsible for any assembly of the product at your site, or the customers site.
- You must only have one supplier for the order. Purchase order factoring only works if you have one single supplier that must be paid for the products. In theory, it could work with multiple suppliers – if and only if – your client’s purchase order allows for partial payments if a supplier fails. The latter seldom happens.
- Your supplier must accept a letter of credit. While most suppliers would like to be paid by wire transfer, unless your supplier is a fortune 500 company, po finance companies will only pay them using a letter of credit. The do this because a letter of credit ensures that the supplier will only be paid if and when they deliver the goods.
- It only helps companies with high profit margins. Due to the costs and transaction structure, your company must have high profit margins (about 30%) to benefit from po funding.
- The funds can only be used to pay your supplier – and nothing else. This point is self explanatory, but po financing companies will not help you pay for rent, payroll or other business expenses.
With these disadvantages, you may be wondering who would want to use purchase order financing. The truth is that po financing is a great product that helps a narrow range of companies. If your company fits that narrow range, it can help you grow your company exponentially.
We also have a related article about the advantage of purchase order finance.