Financing a Distribution Company With Purchase Order Financing and Invoice Factoring

Most distribution companies resell products: they purchase goods from suppliers and sell them at a markup to corporate, industrial, and government clients. This model works well as long as the distribution company has enough money to pay suppliers. However, problems often arise with this model.

Suppliers demand quick payments

The first problem that many distribution companies experience is that suppliers often require fast payments – in ten days or less. Vendors may even demand prepayment for goods if the distribution company is small and has yet to establish credit.

Clients pay in 30 to 60 days

On the other hand, most commercial, industrial, and government clients demand payment terms – the option to pay an invoice in 30, 60, or even 90 days – because it improves their cash flow. They get the option to use and sell your products without having to pay you for a couple of months. Payment terms are usually non-negotiable.

Payment delay creates a cash flow problem

Unless you started your business with a large cash reserve, or have built one, payment delays lead to cash flow problems. Since your vendors require quick payments, but your clients pay slowly, you must make up the difference from your reserves. If you don’t have reserves, you won’t be able to grow your business quickly. In some instances, you may may not be able to fulfill client orders and may have to turn away sales. Unfortunately, if you turn a client away because you cannot fulfill their order, they will go to a competitor and will likely never come back.

Pay vendors with purchase order financing

If you have purchase orders from creditworthy commercial clients and need funds to pay suppliers, consider financing your purchase orders. This vendor financing tool can help you pay vendors, allowing you to fulfill large orders. Purchase order financing works by partnering with a purchase order financing company, who pays your vendors for their product. The purchase order finance company uses your order, and the ensuing invoice, as collateral.

The transaction can close in one of two ways: you can wait until your clients pays for the goods, or you can factor the invoice.

Improve cash flow with invoice factoring

If your commercial and industrial clients are paying in 30 to 60 days, and you need money sooner, consider factoring your invoices. Invoice factoring provides you with immediate funding for your invoices from high quality customers. A finance company advances funds to your company and holds your invoices as collateral. The transaction closes when your client pays the invoice in full, on their regular schedule.

Combining both solutions

Most distributors that use trade finance combine purchase order financing with invoice factoring because invoice factoring is usually cheaper than purchase order financing. As a result, combining both solution lowers the total transaction cost. However, not every transaction can be handled this way, so you should consult your financial adviser.

Advantages

Using these solutions has a number of advantages and few disadvantages. The most important advantage is that you can take on larger orders without hurting your cash flow. Actually, when used strategically, these solutions allow you to take orders that exceed your capitalization, enabling you to grow exponentially.

Can you qualify?

Qualifying for these financial solutions is relatively easy, compared to qualifying for conventional financing. Your distribution company should meet the following requirements:

  • You should work with commercial or industrial clients
  • Your clients should have good credit
  • You should have good invoicing practices
  • Your invoices should not be encumbered by liens

Additionally, if you need purchase order financing, your company should also meet these requirements:

  • Your gross margins should be 20% or more
  • You should sell finished goods

Invoice factoring and purchase order funding can be ideal tools for distribution companies that are growing quickly and need working capital to take advantage of opportunities.

Get more information

Do you own a distribution company and need financing? We can provide factoring and PO financing at competitive rates. For more information, get an online quote or call (877) 300 3258.