Wholesale companies can be very cash-flow-intensive businesses. You often need to buy products from suppliers to build inventory and fulfill sales.
Unless you have payment terms with your suppliers, they often ask that you pay for the goods in advance or upon receipt. On the other hand, commercial clients usually demand payment terms as a condition of doing business. As a result, you may have to wait up to 60 days to get paid for your invoices.
This delay leaves your company in the middle. If you have adequate financial resources, or a line of credit, you should be able to handle these transactions. You simply pay suppliers out of your line and then replenish the line when clients pay you. But what happens if you can’t get a line or if you have exhausted the line and reached your credit limit?
Do you need funds to pay suppliers?
If you have a large order, or simply a stream of orders that has exhausted your financial reserves, consider using purchase order financing. This solution provides supplier financing for large, confirmed orders from creditworthy clients. It handles your supplier payments, enabling you to book and fulfill large orders.
Purchase order financing works by partnering your company with a factoring company who pays your supplier directly, often using a letter of credit. This payment enables your supplier to manufacture the goods and ship them to your client. The transaction concludes and settles when your client pays. Learn more about PO financing.
Do your clients pay slowly?
On the other hand, if you have to offer payment terms to your clients and can’t afford to wait, the solution may be to use invoice factoring. The program finances your invoices from creditworthy clients who take up to 60 days to pay.
Invoice factoring provides your company with an immediate advance that can be used to handle supplier payments or other company expenses. The transaction settles when your customer pays on their usual schedule. Learn more about factoring.
Benefits and advantages
Both solutions have advantages over conventional business funding options. The most important advantage is that they are underwritten differently and don’t have the onerous collateral requirements that institutions impose. This benefit makes these solutions available to small companies who may not have a lot of assets – other than large orders and reliable clients.
Also, the lines are designed to support growth and can adapt to increased sales. They can support a growing business, as long as the orders meet the financing criteria. This flexibility makes these programs ideal options for companies that are going through rapid growth and need immediate financing to support their orders.
Using both solutions to lower costs
A number of companies combine purchase order financing and invoice factoring as a way to lower costs. Invoice factoring has a lower risk profile than PO financing and, therefore, it has a lower cost. An order that starts as a PO financing transaction can often be refinanced as soon as the goods are delivered to the client. The old PO financing line is closed and the transaction continues as a factoring transaction from that point forward.
The transaction is secured by the purchase order and resulting invoice to your client. Consequently, it’s important that your customer has solid commercial credit. Aside from that, your suppliers should have a reliable track record of manufacturing and delivering your orders. Additionally:
- Your accounts receivable should not be encumbered
- Your company should not have legal/tax issues
Additionally, for PO financing:
- Your gross margins should exceed 20%
- You must sell finished goods
If your company cannot meet the qualification requirements for PO financing, consider using inventory financing. This alternative solution can be used by established companies that don’t meet the requirement of this program.
Get a quote
Are you looking for factoring or PO financing? We are a leading factoring company and can provide you with competitive terms. For information, call (877) 300 3258 or get an online quote.