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Purchase Order Financing
“We just received a $100,000 order, but our supplier wants to be paid before he will ship!”
Daily companies receive Purchase Orders, but many do not understand that they can use that PO to finance production of goods. This tool makes it possible for a distributor to utilize a customer’s good credit to purchase goods and ship to the customer.
When a good customer issues a large purchase order, a distributor may not have enough capital or credit lines to purchase the goods. The lender becomes the distributor’s partner and provides a cash advance to pay for goods, so the order can be shipped to customer. Once order is shipped, an invoice is generated and customer remits payment to lender. The distributor receives his money, after lender deducts a fee.
The difference between Accounts Receivable Financing and Purchase Order Financing... A/R Financing advances cash to the distributor after goods are shipped. PO financing makes it possible to pay suppliers before goods are shipped.
For Purchase Order Financing to work, there must be at least a 20% profit margin. Smaller margins are reviewed on a case-by-case basis. This works best for importers and distributors, where finished goods just transit their warehouse or are drop shipped. If the company must make modifications to the goods, it is preferred work be done by a third party.
The benefits of Purchase Order Financing:
| 1) | Orders ship quickly | |
| 2) | No need to use existing lines of credit. | |
| 3) | As a service, credit checks can be done on new customers. |
Purchase Order Financing is commonly used in conjunction with Accounts Receivable Financing. In this way, you are “covered” from the time you receive the order until the customer pays.
Purchase Order Financing - let it work for you!