PO Finance Article: PO Financing - A tool for Importers and Distributors
Usually the defining moment for a small to mid size distributor or wholesaler company is when they get a huge order from one of their best customers. 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 problem. Distributors and wholesalers usually buy the products from suppliers in order to resell 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 purchase order, most business owners try to go to the bank (or similar financial institution) 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, and perhaps more effective, 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 funding 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 business loan, 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 business financing.
Most po financing 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 company that also offers accounts receivable factoring.
Purchase order funding is an ideal tool for small and mid size distributors, wholesalers and resellers who are making big sales and getting ready to take their company to the next stage of growth.
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