There is a feeling of exhilaration that every entrepreneur gets when their company lands a large client – the type of client that could lead to explosive growth. But soon, reality sets in. You start wondering if your company has the capabilities and the financial resources to execute on the order. If it doesn’t, this large, dream sale can quickly turn into a nightmare. If you fail to live up to your part of the bargain, you will lose the client. And when a large client leaves, they usually never come back.
The bank won’t help you
If you are like most business owners whose company needs funding, you go to your local bank. However, you may soon find out that the same bank that was happy to take your money and give you a checking account may not be willing to lend you money.
Most bank financing products are structured to provide funds against hard assets such as real estate or machinery. If you don’t have those assets, or sizable receivables, you can rest assured that your chances of getting bank financing are close to nil. Fortunately, you have one more option.
Purchase order financing can help
There is an alternative source of funding called purchase order financing that considers your purchase orders from creditworthy customers to be an asset. However, this solution cannot be used to finance just any purchase order. The order must meet these criteria:
- You must resell goods – not services
- You must buy the finished goods from a third party (local or foreign)
- Your profit margins must be at least 20%
- The order cannot be a guaranteed or consignment sale
How po financing helps you
Obviously, not every business has orders that meet these requirements. But if your order meets these criteria, purchase order financing can help. The transaction is relatively simple. Once you have the purchase order, the funding company pays your supplier to manufacture and deliver the goods.
The transaction can close in one of two ways. It can close via factoring when the goods are delivered and you invoice your client. Or it can close once your client pays in full. However, using invoice factoring with purchase order financing often reduces the total transaction cost.
Transaction structure
Most transactions are structured as follows:
- You get the purchase order from your client
- The finance company verifies the order and checks the qualification requirements
- The financing company pays your suppliers, usually via letter of credit
- Your supplier manufactures and delivers the goods
- You invoice your client. You can factor the invoice to close the line – or –
- The transaction closes when your customer pays
There are a number of advantages to using purchase order financing over other solutions. The most important advantage is that the facility is transactional and its size is determined by the credit quality of your client, the reputation of your supplier, its profitability, and your ability to execute.
As a result, if your company gets a very large order, you can fund it as long as the order meets the criteria. Purchase order financing is truly a funding solution that can be used to fuel explosive growth.
Get more information
We are a leading po financing company and can provide you with a competitive quote. For information, get an online quote or call (877) 300 3258.