The defining moment for a small to mid size distributor is when they get a large order from a great client. Actually, it is not unusual for large clients to place a few small test orders first, and if everything works well, to follow them up with a stream of very large orders. This is the kind of situation that can truly grow a business and help it reach the next level.
However, this can also present a very significant challenge. Distributors and wholesalers usually buy the products from suppliers to resell them. Suppliers always require to be paid either upfront, or in some instances, with a letter of credit. Large distributors can usually get payment terms or a letter of credit without any problem, allowing them to buy goods from suppliers easily. However, this can present a challenge for small and mid sized businesses that can't get business financing . At its worst, you may not be able to fulfill the order, forcing the client to go to your competitor. The fact is that a big order can either be a blessing, if you have the financing, or a true nightmare if you don't.
When faced with a large order, the first thing most business owners try to do is go to the bank to get a business loan . If their business meets banking criteria, such as having three years of audited financial information that show growing profits, financing may be obtained. But, if the company is new or has not reached profitability yet, there is little chance – if any – of obtaining any bank financing at all.
However, that doesn't mean you have to turn your customer away. It just means you need to obtain your financing from a different source.
Purchase order financing , a long used funding tool in the trade industry, may be the proper solution for you. It enables you to fulfill large orders from credit worthy clients by providing you with the required funding to fulfill the sale. By providing you with the necessary financing, you can pay your suppliers and deliver the order to your client. In the end, you end up realizing major profits and growing your business.
It is important to note that purchase order financing is different from a bank loan and usually not offered by banks. However, it is easier to obtain for than many types of financing. It has two simple requirements. First, the customer making the order must be commercially credit worthy. Large companies and state and federal government entities usually work well. Second, your profit margins (your gains) on the sale should be close to 20% (or better). As opposed to a usual banking arrangement, the po funding company (many times it's also a factoring company ) makes its financing decision based on the credit and stability of the company paying for the order. This makes it easy to qualify for this type of financing.
Most purchase order funding transactions also include a receivables factoring component. Although not widely known, factoring receivables in compnibation with po financing usually allows you to reduce the total transaction cost, maximizing your profits. Because of this, be sure to work with a company that offers po funding and accounts receivable factoring .
PO financing is an ideal tool for mid size distributors, wholesalers and resellers who are making large sales and getting ready to take their business to the next stage of growth.
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