Propel your businesses profits & learn why purchase order financing is an option outside of banks funding to fulfil customer purchase orders.
It often proves to be ideal for your short-term cash flow needs, enabling your big orders to sail through.
Deliver on time, in full and without the need for real estate security.
1. Why Purchase Order Finance is vital for your business
Businesses are always on the look out to expand by getting new and bigger orders. This is the only way through which a business can propel itself to the next level.
Most of the time, it is hard to get a huge order and execute it. When a business ultimately bags one, it is vital that the delivery is done on time and in full. The main constraint with a sudden surge of contracts is usually arrangement of funds. No business would like to forgo an order because of lack of funds.
This would mean letting go of an opportunity to increase profits and expand. Apart from profits, there is also reputation of the business that must be taken into consideration. If you are a business owner who rejects a big offer due to problems with financing or working capital, your name might be tarnished in your field.
You might also have to stop production half way from lack of funds, rendering your business incapable of keeping up the commitment given to the client. If the word goes out in the market that your company is not able to execute projects on time, not many clients would be willing to work with you in the future.
This can permanently hamper your prospects and you might end up with diminishing orders over time, ultimately having to downsize or even shut down your business. To avoid a situation where your profits and reputation take a beating, you must ensure that your business has enough funds all the time.
For companies that are faced with a sudden financial crunch due to windfall of orders, purchase order financing can be a great way to get through the hurdle and also make good profits.
2. What is Purchase Order Financing?
Let’s imagine your business receives a large order from a trustworthy and creditworthy customer but you are not in a position to fulfil the order completely or in time due to lack of finances or capital.
In such a case, you can approach a purchase order finance company for your needs. The company would look at the creditworthiness of your customer & the type of goods whether being finished or work in progress and based on that decide if the transaction is suitable to fund.
If you were a company that is involved in reselling or distribution, the purchase order financing company would directly pay the manufacturer for the goods and have it delivered to your customer (instead of you, however in some cases this does vary from transaction to transaction). While you invoice your customer, the money is collected by the purchase order finance company. It then keeps a small fee that it charges for funding and gives you the balance amount (your profit).
3. How are the fees determined?
You must keep in mind that your purchase order financing company is taking care of all the risk involved in the transaction, so it would definitely charge for its risk. This charge would depend on the amount of financing.
If you seek 100% financing, it would involve a huge risk and a proportionate increase in fees. But when you ask for a smaller percentage, the risk also goes down and so does the fee.
Apart from paying the manufacturer, your purchase order financier might also pay the cost of shipping the goods. Your business may be required to pay up the cost of shipping duty, inspection, and insurance amongst other things.
4. How does it all work?
You must first contact a specialist company that can provide funding against pure orders. You would then obtain a purchase order from your customer and submit this for approval to the company that is financing you.
The lender verifies the purchase order is real with your customer and then finances you in part or full according to the mutual arrangement. This allows you to fulfill your commitment and get all the goods from your supplier in time and in full, and deliver it to the customer.
The lender pays directly to the supplier via telegraphic transfer or letter of credit. The payment to your supplier is usually once the goods have been completed, ready for shipping. The lender then collects payment on the final invoice to your customer, keeps a small fee, and transfers the rest of the money to you being your profit.
Purchase order finance can include end-to-end supply chain management. Freight forwarding, inspections and foreign exchange (FX) services are provided.
5. Will I Qualify?
Credit worthy customers & strong manufactures
Most lenders prefer a stable client who will pay on time without any hassles. This is ensured when your customer is well-known name in the market. Government orders are usually preferred by lenders, as there is a guarantee of getting paid. Other credit worthy customers are always accepted.
Attention is also paid to the manufacturers or suppliers of your goods, as they must prove reliable so that the entire deal goes through smoothly. However, the foremost criteria are the creditworthiness of your client/customer.
One thing that must be noted is that your creditworthiness holds little importance to the lenders as the payment is made to your supplier and received from your client/customer.
It is your client’s creditworthiness that matters:
When most financial institutions look at your creditworthiness for a loan, purchase order funding looks at the creditworthiness of your customer. So, if you own a business that does not qualify for a loan or your credit rating has taken a beating recently, purchase order funding can be a great option. It could be a way through which you can raise yourself in the market by executing successful deals.
You do not have to compromise on other essentials:
When you are strapped for cash, you might have to look into cutting costs and corners that you are not comfortable with. You might be compelled to stall the payments due to your suppliers so that you can fulfil a huge order or postpone payments that attract interest or penalties.
If you are losing sleep due to issues like these, purchase order financing can prove to be a great source where you do not have to pay anything extra or compromise on the essential payments.
Purchase order finance keeps you from increasing your debt:
Since the lender actually finances the purchase order from you, you are not paying any interest or borrowing any money. All you are doing is transferring the monetary risk to the financing company and in turn letting the finance company keep a fee for the service.
You do not have to give the financier anything in collateral or offer equity stakes in your company. This means you retain full control of your business, which every businessman wants.
You automatically increase the cash flow without injecting additional funds:
This is one of the best things about purchase order funding. At the end of the deal, you would have actually increased your turnover and reaped profits without really investing anything in the business.
You can diversify your cash:
There are always several avenues where you can invest money and generate profits. It could be in stocks or just keeping the money in a bank for interest. Purchase order financing keeps your money free wherein you can invest it the way you like.
You can mitigate the risk:
In today’s economy, there is a high degree of uncertainty. You never know when a reputable supplier can suddenly go bankrupt. Purchase order funding can alleviate this risk as the money is paid to the supplier directly ensuring goods are shipped to specification, taking over some of the risks related to non-performance.
At Stak, we believe in educating our clients so that they make the right decision to propel their business to new growth. It is true that purchase order financing might not be what every business needs. But for a business that is strapped for cash and need to fulfil large profitable orders, it could prove to be the best available option.
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We regularly share our thoughts on trade finance, lending, company culture, product strategy and design.
Stak works with clients that sell to some of the largest buyers in Australia & overseas.