Purchase Order Financing
First of all, if you are asking “what is a purchase order”, the most simple definition I can give is that it is an order, from a company, to purchase products from another company. And if your purchaser is creditworthy, you may be able to acquire a Letter of Credit to assist with the Purchase Order Financing. This draw can pay for the raw materials, parts, finished goods, packaging, shipping, inspections, etc.
This is particularly significant for wholesalers, distributors, importers and exporters and is appropriate for numerous kinds of consumer goods.
Clearly, if the management in your company has a good track record in the industry, it will make the Factoring Company feel more contented with your company. Your manufacturer must have a good track record in the production of product in all respects including the delivery of goods being on time, too.
To be clear – Purchase Order Financing will pay for the tangible costs of filling the order. You will not receive any extra money or profit and it is not for operating costs such as lights, labor, advertising, etc., so it might be 40%-80% of the final Invoice amount (subject to your actual profit margin). The P.O. Factoring Company normally requires payment at the time of delivery to your buyer. Obviously there is a cost for this service which will vary with each project and the days the funds are employed. A general figure is between 1% and 5%.
After the order has been delivered to your buyer and you generate an Invoice, the Accounts Receivable Factoring Company will factor that Invoice to satisfy the P.O. Factoring portion of the Invoice. As Accounts Receivable Factoring will normally generate around 80%-90% advance on the final invoice, the manufacturer will receive full payment and you will be entitled to the balance of the advance. After the final Invoice has been paid, your company will receive the balance of the money collected less a minor fee of 1% to 5%.
It is best to work with a knowledgeable Commercial Finance Broker, as the Commercial Finance Broker will know who the most appropriate P.O. Financier would be for you and ensure you set up with the best Accounts Receivable Factoring and Purchase Order Financing Company so everything will work smoothly for you.
Not every Accounts Receivable Factoring Company and Purchase Order Finance Company work in every industry. In addition, each Factoring company will require you to complete each of their application in order to see if you are qualified. Your Commercial Finance Broker will have a general application that will work with all Accounts Receivable Factoring Companies and Purchase Order Finance Companies which will save you time not to mention the Commercial Finance Broker will know which company does what as to not waste time and effort in the application process. The Commercial Finance Broker will know what the Commercial Lenders are looking for right from the start.
At the end of the day, this will allow you to expand your company, stop denying orders, enhance your company’s good reputation with suppliers, customers and banks, and help to fulfill your aspirations of being a business owner.
The whole intention with this type of Commercial Financing is that one day you will get to the point that you will only need the Invoice Factoring Company and Purchase Order Financing Company for the really huge orders as you will be able to complete all smaller to medium sized orders with the funds you have available. In this way P.O. Financing will be reserved only for when you win other massive orders.
Obviously, the last thing you want to happen when those huge sales come in is that you have to turn the business away.
Author: Wade Henderson has been in the Financial Loan Industry for over 15 years now. Over the years he has come across countless scenarios that are now being put into articles on EzineArticles.com.
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