Why PO Financing works best with High Margin Transactions

I commonly get calls from companies that are excited about the prospect of using purchase order financing, only to find out that they don't qualify because their gross margins are too low. So why do many purchase order finance companies usually require high margins (20% to 30%)?

There are a couple of reasons:

1. Finance companies consider purchase order financing transactions to be risky since many things can go wrong. Having a high margin enables some things to go wrong, while providing a sufficiently large cushion to soften the impact.

2. Purchase order financing is not cheap. Especially if you compare it against other forms of business financing such as a business loan. Requiring high margins ensures that the owners have a sufficiently large profit margin to make the transaction worth their while

Can finance companies work with orders that have smaller margins. Of course. They can do so on exceptional situations if the transactions makes sense. But be aware that the risk will also be higher.

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