Commercial Capital – (877) 300 3258 – Factoring Blog

One of the biggest conundrums about purchase order financing is that it’s a flexible product but it can only help a narrow scope of companies. Although purchase order financing can provide great assistance to the companies it works with, it can only work with companies that meet these criteria:

1. The company must be a product re-seller or use a single 3rd party manufacturing supplier
2. The company must have gross profit margins that exceed 20%
3. The company must have at least $50,000 in monthly sales
4. The customers paying for the purchase order must have extremely good commercial credit

For those companies that qualify, purchase order funding provides substantial advantages:

1. Your company can take larger – usually much larger orders
2. No need to turn good clients away because you lack the capital to fulfill their orders
3. You don’t have to worry about supplier payments
4. And if combined with factoring, you don’t have to worry about when your clients will pay

Although you are not usually required to combine purchase order financing with invoice factoring, there is can be an advantage to doing so. On average, the cost per dollar of purchase order financing is more expensive than the cost per dollar of factoring. Because of this, many companies elect to close the purchase order financing line once an invoice is generated. This is done by factoring the invoice and having the factoring company advance some funds to the po financing company to close their transaction. Obviously, where possible, it’s best to work with a company that offers both products since this provides for a more seamless transaction.

Imagine a situation where a product reseller/distributor is using invoice factoring to fund ongoing operations. After long negotiations, they manage to secure a large purchase order from the US government. This order is the biggest order the company has handled  and the owners don’t have enough capital to fulfill it. Since they need funds to buy product, invoice factoring alone won’t help. One solution is to use purchase order financing to fulfill the order and then use factoring to close the PO financing line.

This is how the transaction would work:

1. The po funding company pays the product supplier
2. The supplier delivers the goods
3. The client invoices the customer for the delivered goods
4. The client factors the invoice
5. The factoring company pays off the po financing company and remits any remaining funds to the client
6. The factoring transaction is settled when the customer pays for the invoice

Invoice factoring and purchase order funding can work well together provided your purchase order finance company also offers factoring – or if you work with a factoring company that is open to working with a PO financing company.

Being a reseller or wholesaler is all about moving product. The more product you move, the higher your revenues and profits. But moving high volumes of product requires quite a bit of working capital. Why?

Well, unless your company is well established and has credit, your suppliers will demand that you pay them upon delivery. However, your clients will most likely insist on paying you in 30 to 60 days. This leaves your business with a significant cash flow gap. If your company has significant cash reserves this will be no problem. If it doesn’t, it can spell disaster.

One solution to this challenge involves invoice financing. Invoice factoring eliminates the 30 day payment wait and gets your invoices paid in as little as 2 days. Factoring invoices can help you streamline your cash flow and grow your business. But, there are situations where factoring alone wont be able to solve the cash flow crunch. For example, what if you get a purchase order that is so big that it exceeds your current working capital?

Then, the solution is to use purchase order financing, a little known but highly effective tool to finance growing resellers and wholesalers. The concept behind po financing is a very simple one. The purchase order financing company provides payment to your suppliers, enabling you to close the sale and deliver your order. The transaction with the financing company is settled once your customer pays for the goods. PO funding enables you to take large orders and grow your business effectively.  Since the financing company settles the transaction once your customer pays their invoices, the success of a purchase order funding transaction depends wholly on doing business with reliable customers, such as government agencies or large companies.

To be able to use purchase order financing effectively, your company should meet the following requirements:

1. Do business with customers that pay reliably, ideally large companies or government agencies.
2. Profit margins of at least 15%
3. Your company should re-sell (rather than manufacture) goods

It is not unusual for resellers and wholesalers to use po financing in conjunction with factoring financing, enabling their businesses to have optimal cash flow and the added benefit of being able to take orders of any size.

New and growing businesses face a constant shortage of working capital. This shortage is more pervasive if you sell to other businesses or to the government. Why? Because other businesses and the government can take up to 60 days to pay their invoices. This means that you must find a way to pay employees, rent and suppliers while your wait for payment. More importantly, this cash flow shortage can also prevent you from drumming up new business, forcing you to slow down the growth of your business.

When then need working capital, most business owners go to their local bank for a business loan. However, they usually find out that business financing can be very hard to get. Banks have a number of onerous demands that make loans nearly impossible to obtain. For starters, you must provide a business plan and show financials for the last couple of years. Banks also require that you have substantial assets or a guarantor.  Although bank financing is very cost effective, getting it is quite hard.

So, what options do small and mid size business owners have? Well, two options that have been gaining traction in the past couple of years are factoring financing and purchase order funding. They each work in different circumstances and both can help a business grow. Furthermore, both are relatively easy to obtain and can be set up in days.

Invoice factoring is ideal for companies that sell products or services to business customers that take 30 to 60 days to pay. It provides you with an advance on your slow paying invoices, supplying the capital your business needs to pay employees and suppliers. By eliminating the payment wait, your business operates efficiently and is able to pursue larger opportunities.

Purchase order financing works for companies that resell finished goods, such as wholesalers and importers. PO financing provides supplier payments, usually through a letter of credit, enabling the client to close the sale. The transaction is settled once the client pays for the goods. It’s an ideal solution for small companies that have been getting growing orders and are running out of working capital.

Both factoring and purchase order finance are effective ways to finance a business. And, they are much easier to obtain than bank financing. The biggest requirement is that you do business with reputable clients who pay their invoices, albeit slowly.  This makes it an ideal solution for small and growing firms whose biggest assets are good products/services and a strong roster of clients.

Running an import / export company can be very rewarding and profitable. The US market for Asian imports has been growing at a dizzying speed, allowing many companies to reap the benefits. However, with growth, comes the concern about how to finance it.

The challenge is simple. Most importers must pay their own suppliers immediately when placing an order. However, they are also forced to extend credit to their own customers and wait to be paid until 30, 60 or 90 days after delivery.  Few importers can wait that long to recoup their money, especially since many have multiple orders open at the same time.

Importers that qualify for bank business financing programs, such as a business loan, can usually take orders until they exhaust their bank financing. Smaller businesses can only take orders until they exhaust the owner’s capital. Either way – once the owner’s capital or the bank financing is exhausted, business stops. But it doesn’t have to. Not if the importer starts using purchase order financing.

Purchase order funding is a great financing alternative, that allows importers to grow past their own (or their banks!) financial limitations. It provides the necessary financing to pay supplier costs, allowing the importer to make the sale and deliver their orders with confidence.

A big difference between purchase order funding and conventional financing is that banks look for tangible things (real estate, etc.) as collateral. Factoring companies (who provide po funding), on the other hand, consider your purchase orders from reliable clients to be solid assets that can be leveraged.

Purchase order funding is simple to use and works as follows:

1. You get a large purchase order (or po) from a customer
2. The purchase order finance company pays your supplier by letter of credit. Your supplier delivers the goods to your client
3. Your client receives the goods and pays for them. The transaction is settled and concluded

Much like factoring, purchase order financing is relatively easy to obtain and can be set up in about a week or so. Although rates are very affordable, po financing works best in transactions where the margins are at least 15%.

If you ask the owner of a successful re-seller or importer company to identify their biggest challenge, their common answer will be: lack of working capital. Working capital is the lifeblood of all resellers and importers, enabling them to pay suppliers and allowing them to grow their businesses. Many times, their ability to grow is directly linked to their access to working capital.

So, where do re-sellers that wish to take their businesses to the next level go to get working capital? The bank? Unlikely, as banks are tough sources of business financing. To qualify for a business loan you’ll usually need to provide reports showing three years worth of profitable operations – and – the owner will need to have a spotless credit record. Oh, and if you are a startup, don’t bother. Few banks will provide working capital to startups.

Are there any alternate options? Fortunately, the answer is yes. Purchase order financing (commonly known as po funding) is a great source of financing for startups and growing companies that have exhausted their bank financing options. However, you won’t find PO Funding at your local bank, you’ll find it at your local factoring company.

PO funding is an ideal source of financing for resellers, wholesalers, importers, or just about any business that buys goods from third parties and resells them.  PO financing covers up to 100% of your supplier expenses, enabling you to close big sales and deliver on them. As opposed to traditional financing, purchase order financing uses your purchase order as the actual collateral. There are no set maximum limits, and you can finance as many orders as you want, provided that they come from commercially credit worthy businesses or the government, and have profit margins of 15% or more.

Purchase order funding works as follows:

1. You get a purchase order from a client. You place an order with your supplier
2. The purchase order finance company pays your suppler using a letter of credit
3. Your supplier delivers the product and your client acknowledges receipt
4. Your client pays for the goods and the transaction between the parties is settled

Purchase order financing can be an affordable financing option that allows you to expand your business when your bank financing options have been exhausted. It can truly enable you to close very large orders, especially when combined with factoring, and take your business to the next level.

Most new and growing resellers and wholesalers have a very common dilemma. Their suppliers insist that they pay for goods up front. However, their own clients insist on getting 30 or 60 day payment terms. Few companies, especially startups, can carry the costs of operating the business for 60 days while waiting to get paid. And, those that can wait that long to get paid usually do so at the expense of future growth. They survive by turning orders away and downshifting their businesses, all while waiting to get paid.

Is bank business financing the solution to this dilemma? Hardly. Banks don’t usually lend to startups. And when they do lend money, the process is long and complicated. Furthermore, most banks will require that the business owner present 3 years worth of audited financial statements showing a profit before making a business loan.

But what is your business does not qualify for bank financing? There is an alternative called purchase order financing, and it offers a number of benefits that exceeds what most banks can offer. Its benefits include:

1. PO financing is available to startups and growing companies
2. It covers up to 100% of all supplier expenses
3. PO funding grows with you and is based on your sales potential
4. Can be set up in days – rather than months

So, what is purchase order funding? It a financial option that provides you with funds to deliver the goods on your confirmed non-cancelable purchase orders. It provides you with the necessary financing to pay your suppliers, freight and associated fees. The transaction is settled once your client actually pays for the goods and requires few out of pocket expenses. The collateral for the transaction is your client’s ability to honor the purchase order and pay for the goods.

Factoring companies, which offer po financing, charge for their services based on a number of variables such as the size of the transaction, the complexity and the financial strength of the customer paying for the goods. The charges will be either a percentage of the utilized funds – or in some instances – a percentage of the sales price.

It is also common to use po financing in conjunction with accounts receivable factoring. Factoring is used to finance the invoice that is generated from the po financing transaction and it’s used to close the purchase order financing line. Invoice factoring is usually cheaper than po financing, so using the two together helps reduce the total cost of the transaction.

It is no secret that many small importing companies have become big importing companies by capitalizing on the opportunity to buy goods from Chinese companies and re-sell them at great profit margins. With that accelerated growth comes a very big challenge. Sooner or later, you will get an order that exceeds your available financing.

Now what? Do you turn the order away? Do you send it to the competition?

Purchase order financing can help you deliver on this order and make the sale, while using none (or little) of your own money. It can help you make big sales and grow your company – sometimes exponentially.

To qualify for purchase order funding, you must meet the following criteria.

1. Your business must invoice at least $50,000 per month
2. You must sell finished goods (e.g. be a re-seller or distributor)
3. You must sell your products to other businesses or to the government
4. Your profit margins must be at least 25% (higher is better of course)

If you meet these criteria, purchase order finance can help you deliver on those big orders and help you take your company to the next level. PO financing is simple to use and easy to qualify for.

A transaction works as follows. Once you have an order in place, the financing company opens a letter of credit naming your Chinese supplier as the beneficiary. The letter of credit (or LC) guarantees payment to the supplier, provided they deliver the products correctly. This enables you to complete the transaction.

Once the order is delivered to your end client, an invoice is generated. The transaction is settled once your end client pays the invoice, usually 45 days after receiving it.

As opposed to other types of financing, PO financing is easy to qualify for and to set up. The set up time is usually a couple of weeks. As you can see, this type of financing can help you grow your company by enabling you to take large orders that in the past you would have turned away.

Do you have more purchase orders than what you can handle? Is lack of financing preventing you from fulfilling those orders? One of the most frustrating things that can happen to a business owner is to turn orders away – good orders – because you don’t have the financial capacity to fulfill them.

Of course, you can try to get a business loan. However, business loans have their limitations as business financing tools. They are hard to get and have arbitrary limits, so they don’t grow with your business.

Wouldn’t it be great to have a business financing tool that could handle all your supplier payments – provided you had purchase orders from good customers? How many orders could you close then?

That tool exists and is called purchase order financing. Purchase order financing is a financing product that is offered by factoring companies. The tool’s premise is very simple. Once you have a confirmed purchase order, the factoring company finances all supplier payments, usually by letter of credit. Once the order is delivered and paid for, the transaction is settled.

And how much does purchase order financing cost? Well, it depends on the size of the order, the complexity of the transaction and the commercial credit worthiness of the company paying for the products (your customer). On average, the financing cost will be between 2.5% and 4.5% of the order.

Although purchase order financing is a great tool, it is not for everyone. It works best if your profit margins are between 15% and 30% and if your customers are medium sized (or large) companies or government agencies. If you meet these criteria, purchase order financing can almost eliminate your out of pocket expenses.

If you own a reseller or distributor and have more purchase orders than financial capacity, consider purchase order financing as the tool that can help you close those orders and grow.

Are you selling products or services to the proverbial big box retailers? To companies like Wal-Mart, Costco, Sam’s Club, Lowe’s, The Home Depot and others? There are many advantages to selling to these companies. For starters, they have incredible purchasing power and can place large orders. They can truly help your company grow incredibly and take it to the next level.

On the other hand, they also have incredible clout and negotiating power. That means that they can, and often decide to negotiate payment terms to their benefit. It is not uncommon for big box retailers to pay their invoices in 30 to 60 days. This creates two distinct types of problems, depending on your financial situation:

You can’t afford to wait to get paid

If your biggest challenge is that you can’t wait to get paid by your big box retail clients, the solution may be to factor your invoices. Invoice factoring is a form of financing whereby you sell your invoices to a factoring company who pays you for them. They wait to get paid, while you are paid immediately.

If your big box retailer client places an order that is too large for your current financial situation, your best option is to use purchase order finance. This type of financing is also provided by a factoring company, but covers all your supplier payments. It enables you to complete the order and make the sale. Like factoring, the transaction is settled once the client pays the invoice.

Which one should you use?

Both factoring and purchase order financing can be very useful. Factoring tends to cost less, so as a rule of thumb you should try it first. However, if you need more financing than what factoring can offer, then you should add purchase order financing to the solution portfolio.

Both solutions can be quite affordable though costs will depend on your financing volume. Much like regular retailers, factoring companies give volume discounts and charge less if you use them frequently.  Ideally you are better off using factoring as a recurring financing tool while deploying purchase order financing on a “as needed basis” to help with the big orders.

Getting a large order from your best customer can be one of the best things that happen to your business, if you have the financial resources to deliver it. If you don’t, getting a large order can be a true nightmare. Unless you find a way to deliver it, you risk losing both the order and your customer.

So, if your company needs money, your best bet is to go to the bank, right? Well, not really. At least, not unless your company has a long track record of profitable operations and can show audited financial statements. But what happens if your company is a startup or just not well capitalized?

If you resell goods as a reseller or wholesaler, the solution may be to use purchase order financing.

Purchase order funding works by providing the financing to deliver on the sale, while taking the purchase order as the actual collateral. Now, that is something that you won’t find at you local bank. And since the purchase order is the “collateral”, the biggest requirement to qualify is that you get purchase orders from reputable clients or government agencies.

Here is how a transaction works:

1. You get a purchase order from a large customer
2. The po financing company pays your suppliers, usually via a letter of credit
3. Your suppliers deliver the goods and you complete the sale
4. The transaction is settled once your customer pays for the goods

Since purchase order funding allows you to take large orders, when used properly, it can be a tool that fuels explosive growth. However, purchase order financing does not work for every business. To benefit from purchase order funding:

1. Your business must sell goods – not services
2. You must be a reseller or wholesaler
3. Your profit margins must be of at least 15%

It is quite common combine purchase order financing with some type of invoice financing, such as invoice factoring. The advantage of factoring invoices to refinance your po financing transaction is that it may help reduce your overall transaction cost, increasing your profitability.