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Article: How to Finance Large Sales Using PO Financing

Landing a large order can be a dream come true for many entrepreneurs. After working hard at your business, you get a large order from one of your best customers. It feels great, and you know that this order can take your business to the next level. But soon enough, reality sets in, and you start trying to determine how to actually pull off this large purchase order.

Large orders can create financial problems

If you had not planned for this order, you may find that you do not have enough money to pay your suppliers – who often demand advance payments. And even if you can pay suppliers, most commercial or government clients demand payment terms, so you will still need to wait up to two months to get paid.

Unfortunately, many small business owners soon realize that a large order can be a nightmare if they don’t have the financial wherewithal to fulfill it. And now, their reputation is on the line.

Finance your purchase orders

A little-known but increasingly popular product could help you turn around this situation. In fact, it can actually help you almost any time you have a large purchase order from a large customer or a government agency.

This solution – purchase order financing – is a form of vendor financing that can provide you with the funding you need to fulfill large orders. It differs from other solutions in one key aspect: the main collateral that purchase order financing requires is the actual PO from your client, along with the receivables generated once the order is delivered to your client.

Who qualifies?

Purchase order financing can be great resource for businesses that resell a finished product at a profit. “Finished product” refers to the product as it’s manufactured by your supplier – without any modifications. Companies that buy and then modify products before reselling them do not usually qualify for this solution. However, many import-export companies and wholesalers and distributors can benefit from this type of funding.

Although purchase order financing is an affordable option, it is more expensive than conventional financing because most financing companies consider this type of transaction to be high risk. Consequently, PO financing works best if your profit margins are above 25%.

Lastly, PO financing only works for commercial sales in which the company buying the product has solid commercial credit and the supplier has a strong track record of product delivery.

How does a purchase order financing transaction work?

Once you have the PO in hand, contact the finance company to begin the funding process. First, they verify the creditworthiness of your customer – an important step, since your customer’s payment ability backs the transaction. After that, they review the PO and the track record of your supplier. Lastly, they verify that your invoices are not encumbered by liens. If all checks are successful, the transaction proceeds as follows:

  • We issue a letter of credit (L/C) – payable to your supplier – guaranteeing payment to your supplier as long as they meet your specifications and timeframes.
  • Your vendor manufactures and ships the product.
  • The buyer receives and accepts the product.
  • When the terms of the L/C are met, your supplier collects their payment.
  • Your customer pays for the order and the transaction concludes.

One of the most important features of purchase order financing is that client out-of-pocket expenses are usually minimal. It’s truly a solution that enables you to leverage the financial power of the funding company.

Need more information?

We are a leading provider of purchase order financing. For an instant quote, please fill out this form. Alternatively, call (877) 300 3258 to speak with an expert.

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