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4 things to know about PO financing

Purchase Order financing is a great option for those who do not have to working capital to fill the orders that have been made from their company. Of course, Purchase Order financing can blow up in your face, or backfire if you are not careful. Consider the following four things that you should know about PO financing:

First, most PO financing companies are going to be more willing to offer PO financing and at better terms if all the parts of have worked previously. A new company is going to find it more difficult to get financing for their very first purchase order as they are a riskier client. If you are a business that has been selling the same product from the same supplier for some time, but are attempting to get PO financing for the first time because of the size of the order, it is good to point this out to the lender. It will help them see that all the parts work together smoothly, and have seen success together in the past.

Second, because the PO finance company will want to be paid in full as soon as the customer accepts the shipment, the borrower (you) will likely need to use a factoring company, or accounts receivable financing company as well. This means all your ducks need to be in a row. The AR finance company needs to let the PO finance company know that you have credit. When the shipment is received, an invoice will be produced, and the AR finance company will take over the collection of it, as they will immediately pay the outstanding amount out to the PO finance company. Thus, you can see there will be several parties involved. The PO finance company, the AR finance company, the supplier, the seller/borrower, and the customer.

Third, if you want to use PO financing, you have to have at least a 30% profit margin or the transaction will not qualify.

Fourth, if you are using PO financing, the supplier will need to ship the goods directly to your customer, not use. They are not going to allow you, the borrower, to accept the goods, change them in any way, and then ship them out, as this takes too long. Thus, if you want to use PO financing it has to be on products that are finished and able to be drop shipped directly to your customer from your supplier. In other words, you have to be little more than the third party middle-man.

If you understand these things, you are ready to determine if using PO financing is right for your business. It is certainly a useful option for when you need to fill a purchase order that you do not have the working capital to fill until you get paid, but there are drawbacks, understand them can help you make the educated choice.

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