Purchase order financing is widely used to cover the costs of materials, supplies and delivery expenses associated with various products and services. Huntington Coast Capital has been securing purchase order financing for clients since 2009.
Here are 5 things you should know about purchase order financing:
This financing is offered to cover the cost of goods associated with your sales.
Companies in most all industries have a cost of goods. There are raw materials needed for manufacturing operations, supplier payments required for wholesalers and inventory purchase needs for eCommerce and retail organizations to name a few. In the beginning, most companies finance their cost of goods internally with their startup capital which usually means their personal savings. If you are successful in your business, you will quickly outgrow your internal capital capacity and need to finance the increased cost associated with your sales. This is where purchase order financing plays a critical role in the growth of your business. Without purchase order financing, companies would be limited in how far they could take their business.
Banks do not offer this form of financing (unless you’re a large corporation and qualify to operate through a Letter of Credit).
For most business owners the first option is to speak with their bank when needing a “line of credit” for their business. The problem is that banks do not offer this form of financing for a number of reasons with the inherent risk in the financing being number one. The bank will offer a nominal line of credit, if at all, based on the financial strength of the business. Unless you’re a blue chip company that is well established, profitable and have a long history with your suppliers, you will not be getting any line of credit worth the time and effort.
Larger companies that meet the criteria can operate under a Letter of Credit which serves a similar purpose as purchase order financing, but is reserved for the top tier companies seeking credit.
Here Is A 30-Second Video Explaining How It Benefits Your Business
The cost is between 2.5% and 4% every 30 days on the money borrowed.
The cost you can expect when exploring your purchase order funding options is a monthly cost between 2.5% and 4% charged against the money borrowed every 30 days. For example, if you needed to borrow $100,000 to cover your supplier costs the finance expense would be between $2,500 and $4,000 for every 30-day period the line remains outstanding. If your margins are the typical 30% the sales price would be $130,000 to the customer and you would pay between $2,500 and $4,000 for the purchase order financing line. Your resulting gross profit would be $26,000 to $27,500 depending on the rates charged.
Keep in mind that while this may seem expensive, this represents a profit you would not normally realize without the financing in place. As a matter of fact, purchase order financing doesn’t cost you anything. You actually lose money by not using using it. This is especially true when the purchase order finance company is covering the entire cost of goods including any supplier deposits and shipping and logistics costs. In short, you’re playing with the house’s money as they say. Your margins and profit realized will be reduced, but still substantially better than the zero profit you would realize by not being able to deliver on the order.
Can work in conjunction with other forms of financing
Purchase order finance companies work nicely in conjunction with other forms of financing. In the majority of cases the business owners already have an existing line of credit. The line limit is not adequate to meet their growth needs and the bank has declined offering them further credit. Purchase order finance companies prefer that the company have access to additional credit as this provides further assurance that their line will be paid off.
Allows for unlimited growth of your business as long as the sales are supported by purchase orders from your customers.
As alluded to above, purchase order financing provides your company with the access to capital necessary for growth. Companies in all industries utilize purchase order financing in some shape or form. Firstly, there is the direct borrowing of capital as described in this article and then there is credit offered by suppliers (i.e. n30 terms with discounts for early payment) to support growth. However, the later example is becoming more rare as suppliers are in need of cash flow themselves and are requiring payment at the time of purchase.
Our clients experience the benefits of not having to worry about fulfilling orders. There is nothing worse for a company’s reputation than to promise delivery of a product and then not being able to deliver. When this happens the customer loses confidence and seldom return and offer a second chance. You have one chance to prove yourself. Don’t let lack of capital hold your business back!
If your business could benefit from additional capital, explore the purchase order funding options available to you by contacting us at 844-239-2632 or online here. We look forward to providing your business with solutions and playing a part in the growth of your business!
If you would like to research further, here are some further resources regarding purchase order financing.