Most wholesalers and resellers have a relatively simple business model: they buy goods from suppliers (local or foreign) and resell them at a markup to corporate clients. Although the business model may be simple, running this type of a business is not easy. Managing the cash flow can be difficult, which can limit your ability to grow.
Managing cash flow is challenging
Many suppliers, especially foreign ones, ask for advance payment (as much as 90 days) before manufacturing and shipping goods. On the other hand, many corporate and government clients pay you 45 to 60 days after receiving the goods. So, it can take up to 150 days (90 days for manufacturing and shipping + 60 days for invoice payment) to recover your initial investment and realize profits – a long working capital cycle.
Few companies can afford to wait that long. The only way to grow a company under these conditions is to have very deep pockets – or the right type of small business financing.
Banks won’t help you unless you are a big company
Most business owners seek funding at their local bank. However, most institutions prefer lending money to companies with substantial collateral, reliable cash flows, and long track records of profitability.
Furthermore, they often prefer to work with big companies who need significant funding and are also willing to purchase additional bank services. More often than not, small business owners won’t qualify for these solutions.
Finance your purchase orders
However, an alternative solution has been gaining popularity in recent years. The solution – designed to help wholesalers that must fulfill large orders from creditworthy corporate customers and need funding to do so – is called purchase order financing.
Ordinarily, most clients:
- Resell finished goods at a markup
- Have a large purchase order with high gross margins
- Lack money to pay suppliers
Purchase order financing is a form of vendor financing. The solution covers supplier expenses, allowing you to fulfill large orders from creditworthy clients. The facilities are designed for growth and are determined by the credit quality of your order and your ability to execute it.
Do you qualify?
To qualify for this type of funding, you need a non-cancellable PO from a creditworthy corporate or government client. You must also work with a reputable supplier having a solid track record of delivery. And, obviously, your company must have experience delivering the types of products that you are selling.
Structure
Before funding a transaction, the purchase order financing company performs due diligence on your orders, your company, and your supplier. If the due diligence is successful, the order is funded as follows:
- You get an order from a large client
- You place a subsequent order with your supplier to fulfill your client’s order
- We pay your supplier directly (there are various ways to pay)
- Goods are delivered and your client accepts them
- Once your client pays, the transaction is settled from the proceeds of the payment
Learn more: Read “How does purchase order financing work?”
Test Orders with Big-Box Retailers
Unfortunately, purchase order financing cannot be used for test orders. Test orders are common with big box retailers. Before fully committing to buy your product, retailers often place a small order to test if the product meets their requirements and if market demand forecasts are accurate.
The problem is that most test orders are placed as guaranteed sales (which are similar to a consignment sale). Contrary to what its name implies, a guaranteed sale gives the buyer the right to return any unsold product to you at any time. Basically, your company is guaranteeing that the product will sell.
Test orders can’t be financed because the amount of the final payment is never known. Theoretically, your client could return all the product.
Growth
Purchase order financing is designed with growth in mind. This solution adapts to the changing flow of orders and can grow with your company, as long as your purchase orders meet the qualification requirements. This feature makes purchase order financing an ideal source of funding for resellers and wholesalers that have great potential but lack the cash flow to capitalize on it.
Get more information
We are a leading purchase order finance company and can provide you with a competitive quote. For more information, get an online quote or all (877) 300 3258.