What is PO Financing?

Invoice Factoring Group

In its most common definition, PO financing is a solution that allows resellers to finance their orders for finished goods. It provides working capital to pay your suppliers, enabling you to execute the order and deliver the goods to your client. As opposed to most conventional sources of funding, this solution is based on the strength of your purchase order, the credit quality of your clients and your ability to execute.

Do you have this problem?

One problem that many small resellers face fairly regularly is getting a large purchase order - one that exceeds their current capital availability. Obviously, if your suppliers give you credit and allow you to pay them in 30 or 60 days, you may be able to complete the order as long as your clients pay quickly. If you can't get credit, you have a problem.

Most small resellers cannot get term credit and work with suppliers that demand a quick payment. Furthermore, most commercial clients negotiate payment terms which allow them to pay your invoices in 30 to 60 days. This means that you need the funds to pay their supplier, and then you must be able to wait up to 8 weeks before getting paid back. Few entrepreneurs can afford this, which limits their growth.

The solution

Purchase order financing solves this problem in simple way. A funding company finance your transaction and pays your supplier. This allows your supplier to release the goods and enables you to complete the order. When used correctly, this tool allows you to finance orders that exceed your current capabilities, enabling you to grow your company quickly.

Does your transaction qualify?

To qualify for this type of funding, your transaction must meet the following criteria:

  1. You order must be from a commercial or government client with good commercial credit
  2. Your company must be a distributor (or use 3rd party manufacturing)
  3. Your order must be non-cancelable
  4. Your gross margins must be at least 20%

How does it work?

The transaction is relatively simple. You work with a finance company who pays the supplier costs associated with the purchase order. Most finance companies pay your foreign suppliers using a letter of credit, since this is the safest way to secure the transaction. Local suppliers may be paid directly, as long as they have good commercial credit and a delivery history.

One the goods are delivered, you send an invoice to your customer and wait for payment. The transaction concludes once your customer pays in full. If you would like to learn more, this article has more details about the anatomy of a purchase order financing transaction.

Benefits

This solution has a number of benefits. The most important benefit is that it can enable you to complete large orders, helping you grow the company. But more importantly, the solution is adaptive and has no fixed upper limit. The line will grow to match your sales, as long as you work with reliable suppliers, credit worthy customers and have solid profit margins. This makes this solution an ideal source of funding for growing resellers and distributors whose biggest limitation is access to capital.

How much does it cost?

Given its cost, this solution works best with POs that have a high gross margin. Generally, the cost of financing the transaction will range between 2% and 4% for every 30 days, depending on the structure, reliability of your supplier, creditworthiness of your commercial customer and volume.

Does my company qualify?

The qualification requirements for this program are fairly simple. Your company must meet this criteria:

  1. Your invoices must not have any liens of encumbrances
  2. Company owners must have a track record in your industry
  3. Your company must have completed a few transactions successfully, to demonstrate experience
  4. Your company must not have major legal or tax problems

Get a purchase order financing quote. Question? Call (877) 730 1922.

Previous: Purchase order financing for resellers and traders

Next: Growing your import business with PO financing