Wholesale distributors, sellers and resellers often run into cash flow problems when they receive large orders from their clients. To meet the order these businesses must often secure bank financing just to purchase the initial goods from their suppliers. Then they must wait 30 to 60 days to receive payment from their clients which can leave them with a real cash crunch in the meantime. But what about businesses that don't qualify for a bank loan in the first place? How can they fill customer orders on time? The answer is purchase order financing which they can use to make unlimited sales.
What is Purchase Order Financing?
In effect, purchase order financing is a short-term agreement that gives businesses access to working capital simply for the purpose of securing an order from their suppliers. Typically, these agreements are used when a large order is requested but a business doesn't have the funds to purchase the goods from its suppliers so that it can fill the order from its customer. Financing makes it possible for the company to get the goods in advance so that they can ship the order to the customer and receive payment.
How Purchase Order Financing Works
Purchase order financing works through a third-party arrangement that uses your customer's future payment as a guarantee to pay your supplier for the goods on your behalf. No money or goods are remitted to you. Rather, your client submits the purchase order to you then the financing company issues a letter of credit to your suppliers, promising that they will be paid for the goods. In return, your supplier ships the order to your customer and you issue an invoice as usual. Once the customer pays the invoice the transaction is closed.
Qualifying for Purchase Order Financing
Purchase order financing is not a loan so you won't have to pass a credit check to qualify for it. However, you will need to meet three other criteria. You must have already received the purchase order from a reliable customer. Your product supplier must agree to drop ship the items directly to your customer. You must also agree to an "all sales are final" arrangement. If your purchase order meets all of these qualifications you will likely have your financing request approved.
Product sellers and resellers often have to run a month or two behind in their invoices just to stay in business. In time, this could be damaging to the company's ability to fill customer orders. With purchase order financing, though, businesses can make unlimited sales, confident that they'll have the access to financing they need to court new clients.