Can Purchase Order Funding Bood your Wholesale Business?
Usually the defining moment for a small to mid size distributor
or wholesaler is when they get a huge order from their best
customer. It is not unusual for a large customer to place a few
small test orders, and if everything works well, to follow up
with a stream of massive orders. This is the kind of situation
that can truly grow a company and help it reach the next level.
However, this can also present a very significant challenge.
Distributors and wholesalers usually buy the products from
suppliers in order to re-sell them. And, suppliers always
require to be paid either upfront or with a letter of credit.
Large distribution companies can usually get terms or a letter
of credit without a problem, allowing them to buy the product
from the supplier easily. However, this can present a very big
challenge for small and mid sized businesses that cannot obtain
financing. At its worst, you may not be able to fulfill the
order, forcing the client to go to your competitor. The fact is
that a big order can either be a blessing, if you have the
financing, or a true nightmare if you don't.
When faced with a very large order, most business owners try to
go to the bank to obtain financing. If their business meets
banking criteria, such as having three years of financial
statements and showing significant profits, financing can be
usually be obtained. But, if the business is new or has not
reached profitability yet, there is little chance - if any - of
obtaining any bank financing at all.
However, that doesn't mean you have to turn your client away. It
just means you need to try a different financing avenue.
Purchase order financing, a long standing financing tool in the
trade industry, may be the right solution for you. It enables
you to fulfill large orders from credit worthy clients by
providing you with the financing you need to fulfill the sale.
By providing you with the necessary financing and letters of
credit, you can pay your suppliers and deliver the big order to
your customer. In the end, you end up realizing significant
profits and growing your company.
It is important to note that purchase order financing is not a
bank loan and usually not offered by banks. However, it is
easier to qualify for than many types of financing. It has two
very simple requirements. First, the client placing the order
must be credit worthy. Large companies and state and federal
government entities usually work well. Second, your profit
margins on the sale should be close to 30%. As opposed to a
usual banking arrangement, the purchase order financing company
makes its financing decision based on the credit and stability
of the company paying for the order rather than on your credit.
This is a big difference and enables small and mid sized
distributors to easily qualify for this type of financing.
Most purchase order funding arrangements also include a receivables factoring agreement. Although not widely
known, combining these two types of financing usually allows you
to reduce the total transaction cost. It's an industry trick
that works well at maximizing your profits. Because of this, be
sure that when you seek purchase order funding you work with a
factoring company that
also offers accounts receivable factoring.
Purchase order funding is an ideal tool for small and mid
size distributors, wholesalers and re-sellers who are making big
sales and getting ready to take their company to the next stage
of growth.
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