Why are Gross Margins Important?

Usually, 3 minutes into a conversation with a prospect I will ask about their Gross Margins. to many prospect, this is a personal question and are usually a bit shocked when I ask. But there is a good reason for asking. The gross margin of the transaction is very important in purchase order financing. There are two reasons why we think this is the case:

1. Transaction Safety
We view Gross Margins as a safety cushion that allows for things to go wrong without wiping out our client. Things that can go wrong include late deliveries and product spoilage.

2. Transactions Profits
In finance we use the concept of risk/reward. Basically, the riskier the transaction the higher the reward (or cost of financing). We consider po financing transaction to be much riskier than factoring transactions. This increases the cost. Since we want our clients to have an ample Profit Margin, most po financing companies will only finance transactions that have a gross margin that exceed 15%. This concept often confuses prospects because they are always convinced that their transactions are extremely safe. I will have to disagree. All transactions have risk - which is why the risk free rate in the US is tied to T-Bills.

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