Getting a very large order can either be a blessing – or a curse – for a product wholesaler. If the company has the funds to buy the goods from its supplier and complete the order, you will reap a very good gain. On the other hand, if your company does not have the funds and has to decline the order, you will likely lose the customer who will go to a competitor. For many, declining the order is not an option.
Purchase order financing is tool that can help your company if it has increasing orders but does not have the funds to fulfil them. It provides a simple solution – a finance company pays your supplier for the cost of the goods your are selling. The supplier delivers the goods, enabling you to complete the order. The transaction is settled once your end customer pays for the goods. This type of transaction has the ability to increase your sales capabilities. However, there are some restrictions:
- It only works when you resell finished goods
- It works best if the transaction has high profit margins – above 20%
- Your supplier and your customer must have good commercial credit
- It does not work if you manufacture/assemble goods
Many companies combine purchase order financing with factoring. For many, this has the advantage of lowering the total transaction cost because invoice factoring is cheaper than po financing. Usually this type of transaction is initially structured as a purchase order financing transaction. Once the goods are delivered and invoiced for, an invoice factoring line is used to take out the po financing line. The transaciton concludes when the goods are paid for by the customer and the invoice factoring line is closed.
