Have you ever had a major purchase order from a big company that you could not meet because you could not cover the upfront costs? This is a nightmare scenario for many small business owners. Not having the funds available can lead to the purchase order being canceled and losing the customer relationship completely.
One option available to some businesses is purchase order financing. It offers a way to get the cash you need to cover upfront costs and meet those large orders which can take your company to the next level.
How Would P.O. Financing Work?
Let's say one of your biggest clients comes to you with the biggest purchase order you have ever received. You do not have the cash to cover the upfront costs to fill this order. You contact P.O. lenders to see if they can help.
The P.O. lender will need to check out your client's credit history. If the client is credit worthy, the lender will approve the deal. The lender will send either a letter of credit or a bank draft to your company to pay the manufacturer. The lender will also cover the shipping costs of getting the product from the manufacturer to the client. Your company may bear the costs of inspection, insurance, and any shipping duty costs.
Once the client takes delivery of the goods, your company invoices the client for the merchandise and the shipping costs. If the client pays immediately, the lender collects the money, takes a percentage off the top and pays your company the remainder. If the client pays on terms, the lender is likely to buy the invoice from your company at a discount. You are paid the discounted amount, and the lender awaits payment from the client.
Who Would Benefit from P.O. Financing?
There are a ton of factors that can affect P.O. lending. The lender is putting money forward with only a written purchase order in hand. If the client refuses the merchandise, the shipment is destroyed or lost, or the client goes out of business before the invoice is paid, the lender can be out a large amount of money. That is why P.O. factoring is usually limited to specific types of companies and purchase arrangements.
Most P.O. lenders will only deal with a product reseller or a company that only uses a single third-party manufacturing supplier. This limits the risks associated with such lending. Some of the industries that use these sorts of arrangements include the following:
- Non-perishable foods
- Promotional items
- Consumer products
- Sports equipment
Typical clients are often companies just getting started or ready to go to the next level by taking larger orders. The P.O. lenders can help them get the traction with the working capital to continue growing.
If your company is ready to take that dream order from one of your biggest clients, you need to explore P.O. financing. It may be just the solution you need to grow your company.