Purchase Order Financing for Re-sellers and Trading Companies
Getting conventional financing for a company that resells goods can be pretty difficult. Most institutional lenders, such as banks, will only finance companies that can show a successful track record of operations and enough collateral to cover the line of credit (or loan). Few companies can meet these requirements. And this creates a challenge, because most resellers and trading companies have long payment cycles and often need funding to grow.
In general, most resellers and trading companies operate using purchase orders. They receive a purchase order from a client, and then place the order with their suppliers. Doing this is cheaper than carrying inventory. However, they often have to pay their suppliers before the goods are produced and shipped. Additionally, most commercial and government clients pay their invoices in 30 to 60 days. If you add that to the month or two that it can take a supplier to produce and ship goods, you end up with a cash cycle that can last as long as 120 days.
The reality is that few small companies can afford to wait up to 120 days to recover their initial expenditures and grow at the same time. And since many suppliers reluctant to offer term credit to small resellers, this creates a vicious cycle. One way to break that vicious cycle is to use supplier financing.
Using supplier financing to handle growth
One option that has been gaining traction as a way to finance supplier costs is PO finance. It covers the supplier expenses that are associated with a specific purchase order. This enables you to buy the goods from your supplier, deliver the order to your end customer and complete the sale. When used correctly, purchase order financing can provide the resources you need to take on larger orders and grow your business.
A different type of collateral
Purchase order financing companies consider your purchase orders from credit worthy customers to be a valuable asset that can be funded. The use the underlying invoice that is created when you deliver the goods as collateral for the transaction. Because of this, it is important that your customers have excellent commercial credit. Additionally, your suppliers need to be reliable and have a good track record of product delivery. Lastly, your company needs to have experience in the types of sales you want to finance.
How does a transaction work?
Most transactions follow the conventional structure where the finance company pays your supplier directly for the costs of the purchase order. Depending on where you supplier is located, payment can be made directly or through a letter of credit. Additionally, most transaction require that the goods be inspected by a third party inspection company to ensure that you supplier is delivering the products in the quality and quantity that your purchase order requires. The transaction concludes when your end customer pays.
The transaction follows these steps:
- You receive a purchase order from your client
- You issue a purchase order to your supplier
- The finance company pays your supplier
- Your supplier manufactures the goods
- After inspection, goods are shipped
- Your client received the goods and pays 30 to 60 days later
There are two ways to settle po financing transactions. One way is to leave the transaction open until your client pays for the goods. While this is the simplest method, it can also be the most expensive. Often, you can get a lower total transaction cost by combining accounts receivable factoring with this solution. Once you invoice your client, you factor the receivable and pay off the purchase order finance company. The transaction concludes as a conventional factoring transaction, which has a lower cost.
Is this solution right for your company?
Although this solution is designed specifically for resellers and traders, it is not the right solution for everyone. This program will only help you if your company:
- Resells goods without manufacturing them
- Has confirmed purchase orders from a credit worthy customer
- Has high profit margins - 20% or more
Advantages and benefits
PO funding has a number of benefits. The most important one is that the solution is transactional and can help you tackle large orders that exceed your current capitalization. It can allow you to grow your company without incurring in debt or without giving up any equity stakes. Another advantage of using this solution is that it can be setup quickly - usually in a week or two. Therefore it can be used to take advantage or large orders that arrive unexpectedly. This makes purchase order funding an ideal alternative for small and growing resellers/traders who have growth potential that is restricted by limited working capital.
Get a purchase order factoring quote. Competitive rates and Terms. USA and Canada. (866) 730 1922.