Getting a large order can be a blessing – or a curse – for a product wholesaler. If your company can afford to buy goods from a supplier and wait until the client pays, you will certainly benefit from fulfilling the order. On the other hand, if your company does not have sufficient funds, you will need to decline the order.
By declining the order, you will most likely lose the client as well. For many wholesalers, declining an order is not an acceptable option. Fortunately, there is an alternative.
Finance your purchase orders
One alternative that can help you navigate this situation is a tool known as purchase order financing. This solution can help you if you have a large purchase order from a creditworthy client and need funds to pay your suppliers. PO financing works by using a purchase order funding company to handle your supplier payments, which enables you to fulfill the order. The transaction settles once your client receives the goods and pays for them.
Transaction structure
Most PO financing transactions follow a common format in which a PO finance company acts as a financial intermediary. Transactions are generally structured as follows:
- Your company gets a purchase order
- The PO finance company reviews the order
- If the order is approved, the PO finance company pays your supplier with a letter of credit
- Your supplier delivers the goods to the client
- Your client pays for the goods
- The transaction settles
For more detailed information, please read “How does purchase order financing work?”
Benefits
Purchase order financing has three important benefits that differentiate it from other options. First, qualifying for this program is comparatively easy. You should work with creditworthy clients, have reliable suppliers, and have experience in your industry. Second, the line can handle large transactions – depending on the risk profile of the transaction.
Lastly, the line can grow with your company. This growth potential makes PO financing a flexible solution for companies that are on a growth path and need immediate funding.
Limitations
Purchase order financing works only if you are reselling finished goods. As such, your company must buy goods from its supplier and resell them without modification. Some minor modifications, such as packaging changes, may be allowed.
Your suppliers, especially foreign suppliers, are paid with a letter of credit. Finance companies use this method of payment because it’s relatively secure. If you write the letter of credit well, it protects both the payer and the seller. However, letters of credit add minor complexities to a transaction
Lastly, this solution works only with transactions that have a gross profit margin of 20% or more – for several reasons. First, purchase order funding can be expensive, especially compared to a line of credit. High margins help ensure that you keep a substantial part of the profit. Second, these transaction are seen as riskier than conventional business financing options. A large profit margin provides a cushion to you and the factor in case some product is returned or is defective.
Get more information
We are a leading purchase order financing company in Canada and can provide you with competitive terms. For more information, get an online quote or call (877) 300 3258.