Selling More Without Going Broke

Most product resellers think that getting a large order, or a number of large orders, is the best thing that can happen to their business. In reality, it's only a good thing if you have the capital or business financing to fulfill the order. If you don't, it can quickly turn into a nightmare.

Let's look at a typical example scenario. Johnson Products Supplies imports widgets from China and sells them to big box retailers in the US and Canada. His Chinese suppliers demand prepayments, or payment by letter of credit. His clients pay invoices in 30 to 60 days. For any order, Johnson products needs to pay the supplier, wait 30 days for the goods to reach the US and then wait an additional 30 to 60 days to get paid. In total, the the transaction may last 60 to 90 days. It will take that long before Johnson Products sees any money out of the transaction.

In the meantime, the company needs to pay employees and other expenses associated with the business. It's easy to see how without a large capital cushion, the company could run into problems. Depending on the size of their cash cushion, a few large orders could decimate savings, forcing the owners to delay critical payments (or orders) until current invoices get paid.

One way to solve this problem is to use business financing to cover supplier payments. One alternative solution is to use purchase order financing. PO funding is a specialized tool that can be used by resellers. It covers your supplier costs, enabling to fulfill large orders without having to worry about how to pay your suppliers. That transaction is then settled when the customers pay for the goods.

In many instances, combining factoring and purchase order financing may help a company achieve lower financing costs. These combined transactions are usually structured as follows:

1. The purchase order financing company pays your supplier
2. The supplier delivers the goods to your client
3. Once the goods are accepted, you invoice your client
4. You factor the invoice. The factoring company pays off the purchase order financing company
5. Once the end customer pays for the goods, the transaction is settled with the factoring company

Although combining factoring and purchase order financing can add some minor complexity to the transaction, it can usually decrease the total cost. This is because (on average) the cost per dollar of po funding is higher than the cost per dollar of factoring. PO funding is more expensive than factoring for a simple reason: financing a purchase order (a promise to buy) has higher risk than financing an invoice (a promise to pay).