Purchase Order Financing Basics
Many small and growing resellers have a working capital problem. They have the ability to get large orders, but don't the financial resources to complete the order. Most of the times, they work with suppliers who won't extend credit and will demand payment prior to starting the order. At the same time, they work with commercial or government clients who have contractual terms that provide them up to 45 days to pay an invoice. This means that the entrepreneur may need to pay the supplier immediately, and then wait up to 90 days (or more) before getting paid back. Running a small company under these conditions is very difficult. And growing a company, is nearly impossible.
You can finance orders
One way to solve this problem is to finance your purchase orders. This solution has been gaining popularity in recent years as an alternative to conventional financing options. It provides you with funds, or a letter of credit, to pay your supplier expenses for a confirmed purchase order. This enables you to complete the order and deliver it to your client - allowing you to book the revenue.
PO funding has a number of advantages. First and foremost, it provides the funding to handle large orders. Additionally, the financing is flexible and is designed to grow with your company. You can finance as many orders as you get, as long as they meet the funding criteria and as long as you have the ability to execute them. This makes this program an ideal alternative for growing resellers whose biggest limitation is lack of money.
However, this solution is not a perfect fit for every company and has some disadvantages. First, it can only work if your supplier has a good record and if your customer has a good commercial credit rating. Additionally, it can only be used if you resell finished goods that require no customization or installation. Lastly, the solution only works if your transaction has high gross margins - 20% of above - because of costs.
Do you qualify?
The qualification requirements for po funding are relatively simple. Most purchase order financing companies will look at both your specific transaction and your company. The transaction criteria are:
- The order must not be cancelable and for finished goods
- The buyer must have good commercial credit
- The supplier must have a good track record
- The gross margins must be above 20%
Additionally, your company must:
- Have unencumbered accounts receivables
- Have a track record delivering the goods you sell
- Be free or major legal or tax problems
One requirement that you will not see in the list is to have strong additional collateral - aside form the purchase order. Most po financing companies look at the strength of your order, the quality of your supplier and you ability to execute the order successfully as their most valuable collateral.
Most transactions follow a simple structure, where the supplier is paid directly. The transaction can settle once your customer pays the invoice in full.
- You get the purchase order from your customer
- We pay your supplier
- Goods are inspected and shipped to your customer
- Your customer receives the goods
- After 30 to 60 days, your customer pays and settles the transaction
It is common to combine a purchase order funding line with a factoring plan. Using both solutions can often lower your total transaction cost because you can finance the invoice, and use those proceeds to close the po financing line. On average invoice financing has lower costs that po funding.
Foreign suppliers and inspections
Most transactions that use a foreign supplier will be paid with a letter of credit, that has an inspection clause. This is done to minimize the risk of dealing with foreign suppliers that have a limited track record. The inspections are determined on a per transaction basis. If required, a reputable inspection company (e.g. such as SGS) will be used to ensure that the quality and quantity of your goods meet your specifications and those of your buyer.
Get a po financing quote. Questions? Call (866) 730 1922.
USA and Canada