Is your small manufacturing or distribution business receiving orders from large retailers you are having difficulty filling or manufacturing because of their size? If so, purchase order finance may be a ready working capital solution for you.
How Purchase Order Finance Works
How does Purchase Order Financing (POF) Work? What does this mean for your supplier and your customers? Let’s look at an example.
Say client that places an order for a given commodity worth $100. At the same time, the supplier is charging you $70 for the same commodity and requires that payment in advance. But, you are short the funds. Enter Purchase Order Financing.
Let’s break it down a bit more…
The financing company does an analysis of the purchase order to verify that the order meets the requirements for financing.
The financing company makes the payment of $70 on behalf of the distributor to the supplier. This is done directly through wire transfer or letter of credit. For foreign suppliers, only letter of credit is used.
The supplier then manufactures the goods after the payment has been received.
Delivery of the commodities is made to the client who then accepts after doing a thorough inspection.
You are at liberty to invoice the client. At this stage, the transaction can take two dimensions. The first way is to factor the invoice and use what is received to repay your financing company. The transaction continues as a normal factoring one. Where this is not possible, the transaction can be completed when the customer eventually makes payment for the goods—making the transaction less costly.
Think Purchase Order Financing is Right For You?
Sounds great, right? Well, POF is only conducted for eligible businesses. In order to be a candidate, your business has to meet the follow requirements:
Order Size: The size of the purchase order should be for $50,000 or more in goods (wholesale).
Gross Income. Assessment of the books of accounts must show that you have a minimum gross income margin of 20%.
Factory: Wherever located, the factory must be a “legal” factory with a history of successfully producing the product.
Firm Order: The purchase order must be a firm order without conditions which could negate the transaction once the goods are delivered.
Customer: The retail customer must be creditworthy.
Take Out: There must be a provision in place to “take out” the purchase order finance company once the goods have been delivered. (This is usually accomplished through factoring of the invoice once the goods have been shipped and received).
Goods Only. Not available for service contractors in need of mobilization funds.
One of the best ways to further explore purchase order finance and to see if its right for you and your business is to give us a call and speak with a Business Development Officer. Our knowledgeable Business Development Officers will answer your questions. We’ll even schedule a call with an underwriter. Purchase Order Financing from Blue Ridge Factors could be the answer to your fulfillment needs. To apply online click here. Or download the PDF application here.