For a small business, getting a large order from a coveted client can provide an important opportunity to grow the company. If you manage the order correctly, your client is very likely to become a repeat customer. And a large order is almost always a stepping stone to even larger orders.
However, if you get a large order but your firm is not financially capable of handling it, you will run into problems. You could risk declining the order, but you will most likely lose the client. Or you could try and fulfil the order and risk failing. Both options are bad.
The problem for resellers and distributors
Large orders can be a problem for product distributors and resellers that are not well capitalized. Their biggest problem is usually the timing of payments. Your supplier will often demand an advance payment or a payment upon delivery. However, your clients will usually negotiate payment terms, and pay their invoice in 30 to 60 days. Unless you have enough funds to pay your supplier, you will not be able to deliver.
Bank financing may not help
One common solution is to use bank financing, such as a line of credit, to handle the supplier payment. However, lines of credit are often not accessible to small business owners. Most banks in Canada have very strict underwriting requirements and will only finance companies that have solid financial records, ample collateral and a track record of growth. Unfortunately, most small distributors will fall short of these requirements.
Fortunately, there is another way to finance the order. This tool does not use regular collateral. Rather, it uses the credit strength of your client, the capabilities of your supplier, and you ability to execute the order, as collateral for the transaction.
Using purchase order finance
Financing purchase orders enables you to take on large orders, and provides your company with a financial structure that can support growth. The solution works by partnering with a company that pays the supplier costs that are associated with your order. This enables you to fulfil the order and deliver it to your client. The transaction settles once your end customer pays for the goods, on their regular terms.
Transaction structure
Most transactions follow the simple structure that is outlined here. This structure assumes you already have a financing facility in place and are ready to fund the order:
- You provide the PO and documentation to the funding company
- The po funding company pays your supplier
- Your supplier delivers the goods
- You invoice your client
- Your client pays for the invoice and settles the order
Payment to your supplier will usually be done using a letter of credit, especially if your supplier is not in Canada. Other payment facilities can be considered on a case by case basis.
Also, it’s common to use factoring financing to finance the invoice in step #4. You can use the proceeds from the receivables financing line to payoff the po funding line. Using this technique often lowers the total transaction cost.
To learn more, please read “How does purchase order financing work?”
Qualification requirements
In Canada, qualifying for a po financing line is much easier than qualifying for conventional bank financing. The two most important requirements are that your customer must be credit worthy and your supplier must be reliable. The success of the transaction depends on these two items. Additionally:
- Your gross margins should be over 20%
- Your invoices should not be encumbered
- You must resell finished goods
- The order should not have a consignment clause
- Your company should not have tax/legal problems
Advantages
The most important advantage of a po funding line is that it will enable you to take large orders – even those that exceed your financial capabilities. If used correctly, it can help you take your company to the next level of growth.
Additionally, facilities are usually flexible and can adapt to most order sizes, as long as your client has good credit, your supplier has a good track record and you have experience with the type of order you want to finance.
Get more information
Are you looking for purchase order financing? We are a leading finance company in Canada and can provide you with a competitive quote. For information, get an online quote or call (877) 300 3258.