Purchase Order Financing: Taking On Larger Customer Orders
There are many advantages to being the “middleman,” but having an opportunity to resell or distribute a huge new order but not the funds to purchase the goods isn’t one of them. You’re less-than-creditworthy, which isn’t your fault but nonetheless a problem. Even the bank that holds your business accounts won’t lend you money to help you purchase the product sure to take your small company to the next level. What do you do? You look into purchase order financing.
What Is Purchase Order Funding?
In general terms, purchase ordering financing is money you receive in exchange for the purchase order you wish to attain. You offer the larger order for fantastic new product you wish to resale or distribute to a lender, who then funds the order for you so you can obtain the merchandise.
Bad Credit Isn’t an Issue
Because you are offering up the purchase order as collateral, the lender looks at the customer’s credit history instead of yours. This works well if your company is struggling and in need of this order to bring your books back into the black. Provided your customer has good credit, there shouldn’t be any issue.
The Money Exchange
You won’t receive the money for the purchase order directly; rather, the lender will pay the manufacturer of the product directly, either by bank draft or a letter of credit. You’re only concern is receiving the product to resale or distribute.
Additional Costs Covered
You will likely be absolved of paying merchandise-shipping costs as well, which is fantastic if things are tight. You receive the goods, sort of, yet you don’t have to front the funds for their transport. Depending on your purchase order financing deal, you may have to cover any duty, insurance, or inspection fees, however.
You Noticed the “Sort Of”
You won’t receive the merchandise directly. Rather, the lender will request the manufacturer ship the purchase-order goods directly to your customer or to a third-party warehouse that is adequately bonded. You’ve sold the PO in essence, so you don’t receive the merchandise directly.
You Receive the Profits
Your lender receives the money from the sale of the goods to your customer, takes his or her cut of the profits, and then remits the rest to you. This is how purchase order financing works. It’s a simple concept, and a funding vehicle is designed to ensure that you can secure larger customer orders to benefit your business and its future growth.