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I am looking into using purchase order financing in the future once I get my purchase orders.
What can I do now as I am starting my company to be attractive to the factoring financiers when I need them?
Is it ok to plan on using POF? Or is that usually a fall back plan when you have run out of money, or are growing too fast for your funds?
Purchase order financing typically covers the cost of the materials to produce the product (for which you have an order) and maybe some of the direct labor involved in making the product. It can be very useful in certain situations - like when you receive an unusually large order from a very credit worthy customer.
However, I wouldn`t suggest planning on it as the only or primary source of funding - long term.
Both P.O. financing and factoring are useful tools to fund fast growing companies when traditional sources of financing are not available. It`s OK to plan to use them provided you know when and how to use them and understand their cost.
P.O. financing is used to cover the cost of goods sold before delivery of the product. Factoring is used to accelerate the cash due from invoices generated after the delivery and final sale of goods and services to creditworthy customers.
While you don`t have to use P.O. financing to use factoring, to use P.O. financing you must use factoring or arrange for some other "take-out" financing once the goods and services are delivered and the invoice is generated.
P.O. financing may be a bit challenging to get for a startup - depends on who is actually producing and delivering the goods and services. It will be easier if you`re simply taking orders and a third party will be responsible for manufacturing and fulfillment/delivery.
Factoring is more readily available for start-ups as the factor is primarily looking to the credit strength of your customer buying the product.
As for relative cost, P.O. financing can typically cost from 3.5% to 5% per 30 days. P.O. financing can cover up to 100% of cost of goods sold. Factoring is usually less expensive and ranges from 2.5% to 4% per 30 days. Advance rates range from 60% to 85% of the face amount of the invoice. Due to the cost of these funding solutions, you want to make sure that your gross margins are pretty high as the interest costs associated with these products could eat up about 12-15% of your margin in a 90 day cycle.
My product is manufactured and shipped from a third party factory. They are capable and ready for the volume, so it is just a matter of placing the order. I just won`t have that type money on hand when the first BIG Order Purchases come in.
Marshal, I found your blog very usefull. I was looking for a contact form so I could ask you about this, but lucky me, you found me!
So when would the right time be to use a POF?
Would it work to have it "lined" up before you began working with the brokers and stores and use it the moment you got the BIG PO. So you knew you were covered when telling these stores you are able to provide there large quantities?
Thank both of you for your help!
It`s always best to be prepared in advance so you`re not scrambling for money when the orders start arriving.
Another advantage of getting a head start is the factor can help you pre-screen the creditworthiness of your customer. Especially as a start-up, you don`t want to sell your product to someone who won`t pay.
Lilo,
The situtation you could run into is having a lot of orders, but no money to purchase the product. I would suggest using a local finance company to help you do consumer credit or business credit on 90 days terms. You will get the check within the week. Once they payoff the finance company, they can continue using their card to purchase more product giving you a head start, and keep your cash flow where it needs to be.
Lilo:
We are a financing company specialized in PO financing which fits your situation perfectly - a big order and need fund to purchase to fill in the order. We can issue a LC to your vendor to help your purchase (sure, they will like that). All we need is a legitmate order from a creditworthy company.
Please give me a call @ 626-322-7898 or e mail me at ming@horizon.us.com to discuss your case further.
It is quite hard to finance an ebay retail purchase. Financial institutions/Banks have to look at your business`s balance sheet to determine if they can lend you money, or on your personal financial status.
If you are a wholesaler or distributor and have orders from big companies, we can help you to purchase.
Along the lines of raising capital, does having a couple of contracts for my business services help me get a small line of credit or business loan. My personal credit took a hit in the last year and has dropped into the high 500s.
But as I have stated I have two current contracts and am expecting a third soon. Would a financial institution look favorably on them? Can I use them as leverage to get a L.O.C. of $5,000-10,000.
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