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The challenge is simple. Most importers must pay their own suppliers immediately when placing an order. However, they are also forced to extend credit to their own customers and wait to be paid until 30, 60 or 90 days after delivery. Few importers can wait that long to recoup their money, especially since many have multiple orders open at the same time.
Importers that qualify for bank business financing programs, such as a business loan, can usually take orders until they exhaust their bank financing. Smaller businesses can only take orders until they exhaust the owner's capital. Either way – once the owner's capital or the bank financing is exhausted, business stops. But it doesn't have to. Not if the importer starts using purchase order financing.
Purchase order funding is a great financing alternative, that allows importers to grow past their own (or their banks!) financial limitations. It provides the necessary financing to pay supplier costs, allowing the importer to make the sale and deliver their orders with confidence.
A big difference between purchase order funding and conventional financing is that banks look for tangible things (real estate, etc.) as collateral. Factoring companies (who provide po funding), on the other hand, consider your purchase orders from reliable clients to be solid assets that can be leveraged.
Purchase order funding is simple to use and works as follows:
1. You get a large purchase order (or po) from a customer
2. The purchase order finance company pays your supplier by letter of credit. Your supplier delivers the goods to your client
3. Your client receives the goods and pays for them. The transaction is settled and concluded
As opposed to bank financing, purchase order financing is relatively easy to obtain and can be set up in about a week or so. Although rates are very affordable, po financing works best in transactions where the margins are at least 15%.