Give your business a BOOST with Purchase Order Financing
Let's say that your business suddenly gets a big order from your
best client. However, it is an order that is clearly too big for
you. What would you do? If your business has a good banking
relationship perhaps you may be able to tap into a line of
credit or a bank loan. But what happens if your business is
small or new and you have no banking relationship? Do you turn
the customer away? Fortunately, you don't have to. Purchase
order (PO) financing may be able to help you secure the sale and
deliver the order.
What can purchase order funding do for you?
Purchase order funding is a tool that allows you to
finance your big orders. It provides the necessary funding to
fulfill orders that otherwise you could not afford to deliver.
When used correctly, it can enable you to grow your company
quickly
As opposed to bank financing, purchase order funding does not rely on your company's
financial strength. Rather, it relies on the financial strength
of your customers. This means that if you sell products to large
companies or to government entities, purchase order funding can
be the ideal option to finance those sales.
Who is a good candidate for purchase order financing?
To qualify for purchase order financing, your company must sell products
rather than services. An ideal candidate for this type of
financing would be a product re-seller or distributor who is
buying products from a supplier and then shipping the products
to the client. Purchase order financing can also work in instances where
products are sold in conjunction with services (e.g.
maintenance), however, the product part of the order must be
separate from the services component.
The business case for PO financing
PO financing is simple to use. The po financing company buys the products from your
suppliers in your name, using a letter of credit or similar
instrument. It then ensures that the products are properly
delivered to your client. Once the order is delivered and
approved by your client, the funds from the letter of credit are
released to your supplier.
At this point, the order has been delivered and an invoice is
issued. Most invoices take 30 to 60 days to pay. Once an invoice
is paid, the transaction between the parties is settled. It is
common to combine po financing with receivables factoring because this enables you to
reduce the total cost of the transaction.
Receivables factoring is a type of financing that
provides you with financing based on your receivables (or
invoices) for delivered products. Usually, once an invoice is
generated, the invoice is factored and the funds are used to
close the po financing facility. This is done because the rates
for po financing tend to be higher than the rates for factoring
receivables. This little trick can help you save money and
realize greater profits.
Although po financing is a great tool, it does not work for
every company. However, if you have margins of at least 20% and
good paying customers, you should be able to benefit from it.