Resellers and distributors often have to play a very delicate game of balancing their cash flow. This can even be more challenging if you are buying goods from factories in China, or anywhere in Asia for that matter.
On one hand, the Chinese factories will want you to pay for the goods in a secure way. Their obvious preference is always a wire transfer, in advance of production. However, most transactions are done by letter of credit to ensure that both side comply with their mutual requirements. On the other hand, your commercial clients will often insist on getting payment terms. These give them 30 to 60 days to pay an invoice.
Unless your company is very well capitalized, this can put you in a difficult financial position. Many distributors and resellers don’t have the resources to wait two months for payment. This problem is even more challenging if your company is doing well and has growing orders.
Funding purchase orders
One way to solve this problem is to finance your purchase orders. The transaction works by partnering with a purchase order financing company, who pays your foreign suppliers on your behalf. This allows them to manufacture the goods and ship them to Canada, or where ever their final destination may be. The transaction concludes once your clients receives the goods and pays for them.
Transaction criteria
To qualify for po financing, your company must have a purchase order from a commercial client that has solid credit. This is very important since their credit backs the transaction. Likewise, you should work with a foreign supplier that has a good track record of manufacturing the goods that you sell. Additionally:
- Your gross margins should be above 20%
- You must sell finished goods
- Your invoices must not be encumbered
- Your company should not have serious tax/legal problems
To learn more, please read “How does PO financing work?”
How does it work?
The transaction is relatively simple and is structured as follows. This example assumes that you already have a contract with the finance company:
- Submit PO and paperwork to finance company
- Finance company issues L/C payable to your supplier
- Supplier manufactures and ships the goods
- Your client receives the goods
- You invoice your client
- After 30 to 60 days, your client pays
Inspection requirements
The finance company will put a requirement on the letter of credit that stipulates that the goods must be inspected by a third part, such as SGS inspection services. This helps ensure that your supplier is only paid if they delivered the product according to your specifications, ensuring that the quantity and quality are appropriate to fulfil the PO.
A cost reduction technique
Although this solution has a number of advantages, it can be expensive. Especially when compared to bank financing. One way to reduce the total transaction cost is to use it in combination with factoring financing. Basically, you can factor the invoice at step #5 and use the proceeds to close the po funding line. The transaction then concludes as an invoice financing transaction, which often has lower costs.
Program advantages
A po funding program has many benefits over conventional solutions. It offers a flexible line that can adapt to the size of the transaction. The maximum size of the line is not determined by your corporate collateral. Rather, the finance company looks at the transaction as a whole, specifically the credit worthiness of your order, the capabilities of your supplier and your ability to execute it successfully. This allows small businesses to fulfil orders that significantly exceed their financial capabilities.
Also, the line is comparatively easy to get. Most funding companies don’t have onerous requirements and can work with companies that don’t have a long track record. And lastly, the line can be deployed quickly. This point is very important because the solution can be used to handle large orders that have very short deadlines.
Get more information
Are you looking for purchase order financing? We are a leading finance company in Canada and can provide you with a competitive quote. For information, get an online quote or call (877) 300 3258.