One of the biggest challenges for a small product wholesaler is getting an order that they can’t fulfill because it’s too big. A large order is only a good thing if you have the funding to fulfill it. If not, you may lose the order and the customer- to your competition. This restricts the growth of your business and the only way to get out of this cycle is with purchase order financing.
In this blog, we’ll discuss some common questions related to purchase order financing.
Why are large orders challenging?
A large order is challenging for a small business due to financial constraints. For example, a small company gets an order from a large corporation for cleaning supplies. The large corporation places an order with the small company and waits for delivery.
The small company does not manufacture the products, they just distribute them. They purchase the products from a factory/supplier. The first challenge is that they must front the money for the products. In some cases, they can cover the cost, but end up with low cash reserves. In other cases, the small company can’t cover the cost, so they lose the client.
The second problem is that most large companies expect a net-30 or net-60 day payment term from the supplier. Therefore, after covering the expense of the order, the small company is often left waiting up to 2 months to be paid by their customer and most small businesses can’t do this and survive. The best way to manage this is to use purchase order financing.
What are the options for paying for a large order?
When it comes to small business financing, there are lots of options and each one has its own advantages and disadvantages. For example, a conventional loan could help with your first large order. However, it may not be as helpful in the future, until it is paid down. It can be difficult to get a loan to begin with and they are typically not flexible and have amortization schedules.
A line of credit is a better option, as they are flexible and you can use it as you need to- but the limits are often fixed and can be difficult to obtain. Most small businesses don’t qualify for a line of credit.
A smaller distributor/reseller with a large order might want to consider purchase order financing- it is designed to ease the financial challenges associated with large orders.
Purchase order financing explained
Purchase order financing is a form of financing that helps small business handle their supplier payments. The finance company pays the costs directly, enabling your supplier to deliver the products to your customer. Once the customer pays the invoice, usually in 30 to 60 days, the transaction settles. This allows you to fulfill large orders and continue to run your business.
It is a transactional solution- only used for transactions that you need to have funded. This means that you can use your cash flow to pay financing costs on specific orders. In some cases, purchase order financing is used along with invoice factoring lines. This allows you to reduce the total cost of your transaction.
Typically, purchase order financing costs 3% per 30 days on the funds. This varies based on the size and details of the transactions- there is no standard. Therefore, if your business has a low profit margin or your transactions take a long time, this may not be the best solution for you.
Who should/can get purchase order financing?
Purchase order financing is limited in that it can only be used on orders that meet certain criteria. This criterion includes:
Must be finished goods
Cannot be a consignment/guaranteed sale
Must have a gross margin of at least 25%
Buyer must have good commercial credit
Purchase order not cancellable
Order must be at least $100,000
What are the benefits of purchase order financing?
This type of financing has a few benefits for small businesses. The most obvious and important one is that it can help you fulfill large orders- but there are a few others, including:
Easy to obtain compared to conventional financing
Grows with your business
Quick and easy to set up
If you are interested in utilizing purchase order financing in your company, contact Point High Finance today. We can show you how this type of funding can benefit your company- or if it’s not a good option, we can help you find one that will work for you.