When you get a purchase order and don't have the money to get the inventory or parts to fill the order, what do you do? You factor your receivables, right? Not if you don’t have enough receivables right now. You would get a loan or line of credit, wouldn’t you?
What if you don't have enough business history or enough credit or enough assets to get the loan? The next solution might be to use your credit cards.
What if this order is too big for your credit cards or you don't have credit cards? Even though this order would help your business grow substantially and put you on the road to success, you might have to refuse it, right?
Wrong! If your customer who sent you the purchase order is credit worthy and your supplier who will produce your order has a history of producing quality goods on time, you can probably get purchase order financing. This is sometimes called purchase order factoring.
The purchase order funder advances money to pay for the inventory or issues a Letter of Credit and the supplier sends you the goods. You deliver the order to your customer, generate an invoice and then a factoring company pays you an advance on the invoice. The first thing that gets paid is the purchase order funding company.
You get the rest of this advance for operating capital and get the rest of the invoice amount when your customer pays the invoice. A small fee is paid out of that amount to the factor.
So, you see, this is a two-step process. You work with the purchase order funder and also a factor, since the purchase order funder gets their money when the purchase order is filled (when your customer receives the order).
As you can imagine, this is a bit more expensive than just factoring, since both companies will charge a small fee. Your profit margin should be at least 20% and preferably more for everyone to make a little bit of money.
There should also be a fairly short time between the day you receive the purchase order and the day the order is delivered and the day the invoice is then paid. If it takes 6 months to get the order produced and delivered and another 3 months for your customer to pay, it will be more expensive than a turn around time of 2 months and 45 days to be paid. In that case, you better have a higher profit margin.
The most important thing to do is look at all possible solutions when you get an order you know you can’t fill easily. Don’t give up and refuse the order because you don’t have enough money to deliver. Factoring has been around for thousands of years, it is safe, quite inexpensive and will help your business grow.
Talk to your broker and see what he or she can do for you, there are solutions to almost all problems. Sometimes a Letter of Assurance or a 3-party Agreement can be drawn up which gives your supplier a guarantee that they will be paid out of the factoring proceeds. Then instead of requiring payment on or before delivery (because you are not credit worthy yet), they will give liberal terms because your factoring company is paying them. If you can do it this way, you may not need the purchase order funder at all and will only have one set of fees - more than straight factoring but less than both fees with the two-step process I described.
A good broker will be working with many financial companies that all do different things and when one solution doesn’t work, will try another. So keep trying, don’t automatically refuse that new order.
Donna Poisl is President of Creative Funding Solutions. CFS works closely with several of the best factors and p. o. funders in the country, each with different rates, fees and requirements and is able to find the best one for each client. Contact Donna at PO Financing & Factoring