The phone rings with the call for which you’ve been hoping. You’ve just landed that big sales order that will catapult you to the next level. Deliver the goods on schedule and your customer has told you they will commit to volumes that will significantly increase your revenues and profits for the next twelve months and beyond.
Just before you pop open the bubbly, you realize that you don’t have the cash to buy the raw materials, hire the extra needed workers or pay for the shipping of sub-assemblies. You’ve exhausted your own capital base. Your bank has reached its limits on how much it will lend you. Finding another bank loan might take weeks. Finding an equity partner will likely take even longer and you’ll also have to give them a piece of your company.
Your dreams of success and glory fade as you now visualize a missed immediate opportunity and lost future sales. Of equal if not greater concern are the potential negative ramifications once other customers or your competitors find out you have reached your limits!
Where can you get the cash?
Purchase order financing can be the right tool for your company to take advantage of a variety of sales opportunities in situations resulting from high growth to seasonal increases in business. Plus, it’s not just for growth companies as it is also available for startups and even turnaround candidates.
Companies from a wide variety of both manufacturing and services industries (with the exception of the construction industry) have utilized purchase order financing for both finished goods and non finished goods. This tool for explosive growth can be used to meet your sales goals in purely domestic as well as import and export situations.
If you have gross margins of at least 18 percent on the sale of your product, purchase order financing can enable you to drive your sales skyward. Like any financing, the cost of utilizing purchase order financing can vary. As a rule of thumb, the purchase order financier will charge a transaction fee in the range of 4 to 7 percent of the gross amount funded. The fees may be higher if the amount of time to deliver the product or service exceeds 30 days. The financier will fund a maximum of 100 percent of the costs to produce your product or service which can include deposits, raw materials, components, sub-assemblies, overhead, labor costs, shipping charges and letters of credit.
Upon completion of the product and shipment to your customer, you’ll be expected to re-pay the purchase order financier. This is often accomplished by taking the receivable generated upon shipment of the goods and financing it with a factor or other lender (possibly your existing bank). A factoring or other financing fee may also apply adding another 3 to 6 percent to your total cost of this financing to complete this sale. Advance rates on the receivable financing can approach 85 percent of the invoice amount allowing you to fully repay the purchase order financing.
It’s all about the collateral
Each purchase order financier will have its own documentation requirements with the purpose of determining if you have a verifiable, non-cancelable order for your product with a creditworthy customer. Also, if your current lender has a blanket lien on your assets, the purchase order financier will ask for a release on the assets associated with the financing transaction.
So the next time the phone rings with a big order and you hear a loud, pounding noise - just relax! That’s not your heart exploding in fear. It’s opportunity knocking at your door!
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Related Tags: factoring, accounts receivable, p.o. financing, purchase order financing, bank loans, small business, working capital, cash flow, business loan
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