One of the primary dilemmas about purchase order (PO) financing is that – although it’s a flexible product – it can only help a narrow set of companies. This article helps you understand PO financing and determine if your company is a good candidate for it.
The requirements for PO financing are fairly simple, though they narrow the type of companies that it can work with. To qualify, a business must:
- Be a product reseller or use a single third-party manufacturing supplier
- Have gross profit margins that exceed 20%
- Have at least $100,000 in monthly sales
- Work with commercial customers who have good credit
For those companies that qualify for this solution, purchase order financing provides substantial advantages:
- Your company can take much larger orders
- No need to turn away good clients because you lack the capital to fulfill their orders
- You don’t have to worry about supplier payments
- If combined with factoring, you don’t have to worry about when clients pay
Because of how transactions are structured, PO financing lends itself well to companies in the wholesale distribution and reseller industries. Most clients are start-up companies that have recently gained traction and need working capital to continue to execute their growth strategy.
Who cannot use PO financing?
Unfortunately, purchase order financing cannot be used by companies that manufacture goods directly. There are two reasons for this restriction: first, most manufacturing companies have many suppliers and order goods in various quantities – thereby complicating the management of supplier payments associated with a specific order; second, the manufacturing process may not produce goods that meet the customer’s requirements – leaving the funding company responsible for paying suppliers but without a way to deliver products and conclude the order.
However, manufacturing companies can use supplier financing. This solution offers a number of the benefits of purchase order financing.
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