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Purchase Order Financing: for Start-ups and Established Businesses |
Written by Anil Thakur
Thursday, 13 March 2008
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If you are a new business and you get a request for a huge order, it's exciting, isn't it? You start mentally adding up all the money you will make, all the supplies you can buy, all the business you can get after that. Then when you talk to the manufacturer of the product, and discover they need partial payment before shipping, perhaps even some when you place the order and the rest on delivery, you realize you'll have to refuse the order. Since you are a new business, you don't have the credit history that will allow you to have payment terms and you don't have a bank line of credit. If you are an established business and you get a huge order, you also might have to refuse it. You might not have a good credit history or might not have a large enough line of credit with your bank. There is a solution, called Purchase Order Financing. If your customer is established and has good credit, you can get a Letter of Credit or an advance of funds on the purchase order. This advance will pay for the raw materials, parts, finished goods, packaging, shipping, inspections, etc. This is especially important for wholesalers, distributors, importers and exporters and is suitable for many different types of consumer goods. Obviously, if your company management has a history in the industry, it will help the investor feel more comfortable with your company. Your supplier has to have a good record of producing the goods and delivering on time, too. P.O. Financing pays for the actual costs of filling the order, it doesn't give you any extra money, it is not for operating costs, etc., so it might be 40%-70% of the invoice amount (depending on your profit margin). The P.O. financier usually has to be paid when the product is delivered to your customer. There is a small fee for this service, it varies with each job and the time frame involved, but is usually 1%-5%. Once the product is delivered to your customer and you issue an invoice, you will want to factor that invoice so the P.O. financier is paid back by the factoring company. Since factoring gives you around 80%-90% advance, the supplier will be paid in full and you will get the rest of the advance. Then when the bill is paid, you'll get the rest of it minus a small fee of 1%-5%. When you work with a good broker, that broker will find the best P.O. financier for you and then get you set up with the best factor so everything will flow smoothly for you. This will allow you to grow your business, accept more orders, build up a good reputation with suppliers, customers and banks, and fill all your dreams of being a business owner. You will eventually get to the point where you will be able to keep your business growing by using a factor for all or most of your invoices and will be able to fill all small and medium size orders with the capital you have. You will probably need P.O. financing only when you get another huge order. Article Source: http://www.ArticleBlast.com |
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