Getting a large order from your best customer can be one of the best things that happen to your business, if you have the financial resources to deliver it. If you don’t, getting a large order can be a true nightmare. Unless you find a way to deliver it, you risk losing both the order and your customer.So, if your company needs money, your best bet is to go to the bank, right? Well, not really. At least, not unless your company has a long track record of profitable operations and can show audited financial statements. But what happens if your company is a startup or just not well capitalized?
If you resell goods as a reseller or wholesaler, the solution may be to use purchase order financing.Purchase order funding works by providing the financing to deliver on the sale, while taking the purchase order as the actual collateral. Now, that is something that you won’t find at you local bank. And since the purchase order is the “collateral”, the biggest requirement to qualify is that you get purchase orders from reputable clients or government agencies.
Here is how a transaction works:
1. You get a purchase order from a large customer2. The po financing company pays your suppliers, usually via a letter of credit3. Your suppliers deliver the goods and you complete the sale4. The transaction is settled once your customer pays for the goods
Since purchase order funding allows you to take large orders, when used properly, it can be a tool that fuels explosive growth. However, purchase order financing does not work for every business.
To benefit from purchase order funding:
1. Your business must sell goods – not services2. You must be a reseller or wholesaler3. Your profit margins must be of at least 15%
It is quite common combine purchase order financing with some type of invoice financing, such as invoice factoring. The advantage of factoring invoices to refinance your po financing transaction is that it may help reduce your overall transaction cost, increasing your profitability.
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