Purchase Order Financing 101
As a widely misunderstood product, many business owners assume that purchase order funding gives you money by using your purchase orders (POs) as a collateral for a loan. This is not true, and this article will help you understand purchase order funding better and decide if it’s right for your company.
Is your company a good candidate for purchase order funding?
That depends on how your company is set up. These elements are a good indication that it might be:
- You buy and resell products without making changes
- You do not manufacture those products you sell
- Your gross margins are 20% or higher
- Your suppliers are in good financial shape and have an excellent track record of product delivery
- Your customers have good business credit
- Your POs are not cancellable, nor do they have consignment provisions
Very specific requirements must exist in order for purchase order funding to be a good business option. It typically works best for resellers and distributors that have a purchase that exceeds their current abilities and they need financial help to fill it.
Typically, a purchase order funding transaction works like this. Your customer has ordered $1000 worth of tambourines, and your supplier charges you $60 for those same tambourines and wants you to prepay the cost for the instruments. This is where PO funding can help. Typically, the funding company will pay the supplier directly by wire transfer or letter of credit. Now, your tambourines are manufactured and sent to the customer, and you invoice them.
Lowering transaction costs
At the point where you invoice your customer, you can wait for payment from them, or bring in a factoring company to free up your cash more immediately. Even better, when combining purchase order financing and factoring can save you significantly. Crunch the numbers and see what works best for your situation.
If you need more information, give us a call and we can explain things better and offer competitive rates.