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.
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