How to fund your growing sales with PO Funding
It is almost like a dream come true. After working very hard at
your business, you get a huge purchase order from one of your
best customers. You can almost feel the sweet taste of success.
Soon, however, reality sets in. If you are like most small to
mid size businesses, you realize that you don't have enough
money to buy supplies because your suppliers are demanding
advance payment. You now risk losing the order unless you find a
way to finance it.
If your company has been in business for many years, is
reasonably big and has a great track record, you will probable
be able to get a business line of credit or a similar type of
bank financing. If that is the case, you'll be able to borrow
money to pay your suppliers and fulfill the order. But what
options do you have if you are a new business owner or if you
run a small business that has no bank credit?
There is a little known and seldom used financing product that
could help you in this situation. As a matter of fact, it could
help you almost any time you have a big sale to a good credit
worthy customer. It is called purchase order financing (also
known as purchase order funding or po funding).
Purchase order funding can provide you with the financing you
need to fulfill orders from your large and best credit worthy
clients. As opposed to most financial products, the only
collateral that purchase order financing requires is the actual
purchase order (and associated payments) from your client. The
financing company will provide you with the necessary capital to
fulfill and deliver the order. They get paid when the client
pays for the order. This makes it an ideal product for small and
mid size businesses who are growing quickly and need capital to
deliver orders to their ever growing client list.
Who qualifies for purchase order funding?
Purchase order financing is ideal for companies that
re-sell a finished product at a profit. For example,
import-export companies, wholesalers and distributors can
certainly use this type of financing. However, if your company
buys a product and modifies it before re-selling it, most
probably it will not qualify for this type of financing (there
are exceptions).
Although purchase order financing can be affordable if your
profit margins are right, unfortunately it does not come cheap.
This is because most financing companies consider the
transaction to be high risk. The total cost of the transaction,
from start to finish, can be anywhere between 5% and 15% of the
sales price. Because of this, purchase order financing works
best with businesses that have profit margins of 25% or more.
Lastly, purchase order funding only works for commercial sales
in which the purchasing company has a good commercial credit
score (as most large businesses tend to have).
How does the purchase order funding transaction work?
The transaction itself is actually fairly simple. Once you have
the purchase order in hand you contact the purchase order
funding company to begin the process. The first thing they will
do is verify the credit worthiness of your customer. If the
credit review is good, the transaction proceeds as follows:
1. The financing company issues a letter of credit in favor of
your supplier. The letter of credit states that payment is
guaranteed, provided the supplier delivers the product according
to the buyer's specifications. Almost all suppliers accept
letters of credit as payment.
2. The supplier manufactures the product and ships it to you, or
drop ships to the buyer.
3. The buyer receives the product and accepts it. Your supplier
gets paid by cashing the letter of credit.
4. Your customer pays for the order, usually 30 days or so after
receipt. The financing company is paid back for its services and
all remaining funds are yours.
One of the remarkable features of purchase order funding is that
in most cases, the client has few out of pocket expenses. It's
truly a transaction where you can use other people's money to
grow your business.
Lastly, purchase order financing transactions are frequently
integrated with accounts receivable factoring. This is a widely used
trick that can help reduce the cost of financing the
transaction, thereby increasing your profits.
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