Do you sell to the government or to large companies? Do you regularly get purchase orders that stretch your company’s ability to deliver? Lastly, if you had financing to cover all your supplier costs, could you sell more? Much more?

If you answered yes to any of these questions, then purchase order financing could help your business grow.

Purchase order financing is a way of financing sales that has been gaining popularity with US and Canadian businesses. It offers a very simple proposition. If you have an order from a large credit worthy business (or government agency), then the financing company will provide you with the necessary funding to fulfill your supplier payments and make the sale. Call it sales based financing. It works well for resellers, distributors and wholesalers, although it can also be used in other industries.

Here is how purchase order financing works. Let’s say that you own a company that has been getting progressively larger orders, tightening your cash flow. After setting up a purchase order financing agreement, this is how your sales financing would work:

1. You get an order from a client
2. The purchase order finance company handles up to 100% of your supplier payments (by direct payment or letter of credit)
3. The order is fulfilled and the goods are delivered
4. The transaction is settled, once the client pays their invoices

As you can see, purchase order financing allows you to leverage the resources of the financing company and allows you to increase your sales. With PO financing, lack of cash flow will never be a reason to lose a sale.

As opposed to a business loan from a bank, purchase order financing is very easy to obtain and can be set up in days. The main requirement is to have valid orders from good commercial or government clients. Most banks won’t offer this type of financing, but you can get it from a factoring company. As a matter of fact, purchase order financing and invoice factoring are frequently combined to help reduce the costs of the transaction.

So, if your purchase orders are piling up, be sure to consider financing with factoring and purchase order funding.

The biggest challenges that many import companies have is finding a way to pay suppliers when a customer places a large order. As is common in import transactions, you must pay your suppliers using a letter of credit and then wait until the goods are delivered to your customer before your customer pays you. This creates a window of time, sometimes as long as 90 days, between the time that you pay your suppliers and the time that your customers pay you.

But what happens if you don’t have the funds to obtain a letter of credit? Or, if you can’t wait for a long time to get paid?  Do you pass on the order? Well, you don’t have to. Not if you decide to use purchase order finance.

Purchase order financing is a tool that allows you to easily make large orders – even if you don’t have the money to pay suppliers and if your company is new.  It provides you with up to 100% of the funds needed to pay your foreign suppliers, enabling you fulfill your large orders and grow your company. And it works for almost all companies because of a unique feature. Almost any company can qualify, provided you have a purchase order from a government agency or a strong commercial customer. Indeed, your collateral for the transaction is the reliability of your customer. This make po financing a very unique tool for importers that are buying goods from China, Taiwan, Brazil, Russia or almost any country in the world.

Purchase order financing easily integrates to your company and is easy to use. Here is a sample transaction:

1. Your commercial or government customer places a purchase order with you
2. Your company places an order with your local or foreign supplier
3. The purchase order finance company provides a letter of credit to pay your supplier
4. Your supplier delivers the goods to your customer
5. The transaction is settled once your customer pays for the goods

As you can see, this transaction is completed with little if any of your own funds and the financing company covers most costs. This is ideal for new companies or companies that have exhausted their capital.

Many times, a customer may take up to 60 days to pay for the goods. This is especially true if you are selling goods to large companies that demand payment terms. In that case, you may need to also use factoring financing. Combining invoice factoring, which costs less than po financing, with po funding enables you to lower the total transaction cost.

Your transaction cost will vary based on a number of variables such as size and credit worthiness of the buyer. Generally speaking, larger orders from credit worthy customer (or government agencies) will have the lowest costs.

Both factoring and purchase order financing are offered by factoring companies, although not every factoring company offers both.

One of the biggest challenges for new and growing importers, resellers and wholesalers is getting a stream of orders from great clients and not being able to fulfill them because they lack the capital to do so. It is ironic, but true.

Going to a bank for business financing will seldom help. Why? Well, banks are happy to give you business loans if you have lots of collateral. However, banks don’t consider purchase orders to be collateral. This puts you, the wholesaler, in a bind. You have the order but you can’t get the money.

Fortunately, there is a solution that is better than a business loan. And it is tailored specifically to importers and wholesalers. It is called purchase order financing.

What is purchase order financing? It’s a tool that provides you the necessary financing to pay your suppliers using the purchase order as collateral. It enables you to deliver the goods, close the sale and book the revenue. When used correctly it can help owners grow their companies exponentially.

Although po financing is a great tool, it only works from companies that buy goods from other parties (or import them) and then resell them. It also works for companies that use 3^rd party manufacturing partners. Unfortunately, purchase order financing does not work for companies that do their own manufacturing.

So, how does purchase order finance work?

1. You get a confirmed purchase order from your client
2. The purchase order finance company pays your supplier
3. Your supplier ships the products, which are delivered to your customer
4. Once your customer pays, the transaction is settled

As you can see, purchase order funding is fairly straight forward to use and works well with most companies. It is also fairly easy to obtain. The main requirements are that you have a solid purchase order from a reliable customer and a well run business. It is also common to combine purchase order financing with accounts receivable factoring (also known as factoring). When used correctly, the combination of these two financing tools can help reduce the overall transaction costs and enhance your profitability

On average, purchase order financing works best in situations where the client has a profit margin of at least 25%. However, most purchase order finance companies can work with lower profit margins if the transaction is large or has exceptionally good customers.

Do you distribute, re-sell or sell wholesale products? If you do, you will soon encounter what may be your biggest opportunity for success… or failure. A large order from your best customer. A large order that exceeds your current financing capabilities. If you deliver it successfully, you can count on taking your company to the next level. If you don’t, your competitors will be the ones that eat your lunch and take their business to the next level

So, how do you handle an order that is too large for your business? You finance it. How? Using purchase order financing.

Let’s look at how things work in your business right now. Every time you get a purchase order from a client you go ahead and order the product from your suppliers. You either pay your supplier upfront or using bank financing. The supplier delivers the product and then your client pays you 30 or 60 days later.

However if you don’t have enough money to pay your supplier, the whole transaction falls through. Purchase order financing can provide you with up to 100% of the funds needed to pay your suppliers and make the sale.

There are only three major requirements to qualify for purchase order financing:

1. You must have a purchase order from a large credit worthy commercial customer
2. Your supplier must drop ship items directly to your customer
3. Your sales must be final (e.g. no guaranteed sales or consignment)

If you meet these three criteria, you have a very good chance of qualifying for purchase order financing. Purchase order financing works as follows:

1. You get a large purchase order from a client
2. The purchase order financing company issues a payment guarantee to your suppliers (usually through a letter of credit)
3. Your supplier drop ships the order and you issue an invoice
4. Once your client pays the invoice, the transaction is settled

With purchase order financing, your sales capabilities will no longer be limited by your financial strength. You can sell as much as you can finance. And – if your clients are credit worthy and good payers –you can finance as much as you want, the sky will be the limit.

Being a reseller or wholesaler is all about moving product. The more product you move, the higher your revenues and profits. But moving high volumes of product requires quite a bit of working capital. Why?

Well, unless your company is well established and has credit, your suppliers will demand that you pay them upon delivery. However, your clients will most likely insist on paying you in 30 to 60 days. This leaves your business with a significant cash flow gap. If your company has significant cash reserves this will be no problem. If it doesn’t, it can spell disaster.

One solution to this challenge involves invoice financing. Invoice factoring eliminates the 30 day payment wait and gets your invoices paid in as little as 2 days. Factoring invoices can help you streamline your cash flow and grow your business. But, there are situations where factoring alone wont be able to solve the cash flow crunch. For example, what if you get a purchase order that is so big that it exceeds your current working capital?

Then, the solution is to use purchase order financing, a little known but highly effective tool to finance growing resellers and wholesalers. The concept behind po financing is a very simple one. The purchase order financing company provides payment to your suppliers, enabling you to close the sale and deliver your order. The transaction with the financing company is settled once your customer pays for the goods. PO funding enables you to take large orders and grow your business effectively.  Since the financing company settles the transaction once your customer pays their invoices, the success of a purchase order funding transaction depends wholly on doing business with reliable customers, such as government agencies or large companies.

To be able to use purchase order financing effectively, your company should meet the following requirements:

1. Do business with customers that pay reliably, ideally large companies or government agencies.
2. Profit margins of at least 15%
3. Your company should re-sell (rather than manufacture) goods

It is not unusual for resellers and wholesalers to use po financing in conjunction with factoring financing, enabling their businesses to have optimal cash flow and the added benefit of being able to take orders of any size.

New and growing businesses face a constant shortage of working capital. This shortage is more pervasive if you sell to other businesses or to the government. Why? Because other businesses and the government can take up to 60 days to pay their invoices. This means that you must find a way to pay employees, rent and suppliers while your wait for payment. More importantly, this cash flow shortage can also prevent you from drumming up new business, forcing you to slow down the growth of your business.

When then need working capital, most business owners go to their local bank for a business loan. However, they usually find out that business financing can be very hard to get. Banks have a number of onerous demands that make loans nearly impossible to obtain. For starters, you must provide a business plan and show financials for the last couple of years. Banks also require that you have substantial assets or a guarantor.  Although bank financing is very cost effective, getting it is quite hard.

So, what options do small and mid size business owners have? Well, two options that have been gaining traction in the past couple of years are factoring financing and purchase order funding. They each work in different circumstances and both can help a business grow. Furthermore, both are relatively easy to obtain and can be set up in days.

Invoice factoring is ideal for companies that sell products or services to business customers that take 30 to 60 days to pay. It provides you with an advance on your slow paying invoices, supplying the capital your business needs to pay employees and suppliers. By eliminating the payment wait, your business operates efficiently and is able to pursue larger opportunities.

Purchase order funding works for companies that resell finished goods, such as wholesalers and importers. PO financing provides supplier payments, usually through a letter of credit, enabling the client to close the sale. The transaction is settled once the client pays for the goods. It’s an ideal solution for small companies that have been getting growing orders and are running out of working capital.

Both factoring and purchase order finance are effective ways to finance a business. And, they are much easier to obtain than bank financing. The biggest requirement is that you do business with reputable clients who pay their invoices, albeit slowly.  This makes it an ideal solution for small and growing firms whose biggest assets are good products/services and a strong roster of clients.

Running an import / export company can be very rewarding and profitable. The US market for Asian imports has been growing at a dizzying speed, allowing many companies to reap the benefits. However, with growth, comes the concern about how to finance it.

The challenge is simple. Most importers must pay their own suppliers immediately when placing an order. However, they are also forced to extend credit to their own customers and wait to be paid until 30, 60 or 90 days after delivery.  Few importers can wait that long to recoup their money, especially since many have multiple orders open at the same time.

Importers that qualify for bank business financing programs, such as a business loan, can usually take orders until they exhaust their bank financing. Smaller businesses can only take orders until they exhaust the owner’s capital. Either way – once the owner’s capital or the bank financing is exhausted, business stops. But it doesn’t have to. Not if the importer starts using purchase order financing.

Purchase order funding is a great financing alternative, that allows importers to grow past their own (or their banks!) financial limitations. It provides the necessary financing to pay supplier costs, allowing the importer to make the sale and deliver their orders with confidence.

A big difference between purchase order funding and conventional financing is that banks look for tangible things (real estate, etc.) as collateral. Factoring companies (who provide po funding), on the other hand, consider your purchase orders from reliable clients to be solid assets that can be leveraged.

Purchase order financing is simple to use and works as follows:

1. You get a large purchase order (or po) from a customer
2. The purchase order finance company pays your supplier by letter of credit. Your supplier delivers the goods to your client
3. Your client receives the goods and pays for them. The transaction is settled and concluded

As opposed to bank financing, purchase order financing and factoring are relatively easy to obtain and can be set up in about a week or so. Although rates are very affordable, po financing works best in transactions where the margins are at least 15%.