Home / Business / How Does Purchase Order Factoring Work?

How Does Purchase Order Factoring Work?

Purchase order factoring is one of the foremost misunderstood products within the factoring industry. In part, this is often probably because the name is both generic and enticing.

Purchase order factoring, or Financing, is a sort of commercial financing that permits a business to receive funding foar a pre-ordered project using the acquisition order from the client as collateral.

Here is how a purchase order financing transaction is typically structured. Let’s assume that your customer has placed a sale order to shop for $100 worth of products. Your supplier charges you $70 for those products. Additionally, your supplier wants you to prepay the $70, and your company doesn’t have the cash to prepay for the products. This is often where order financing comes in. The financing company can assist you to complete this sale by structuring the subsequent transaction (assuming you’ve got a financing contract in place):

  • The purchase order financing company reviews the transaction to make sure that it complies with the funding requirements.
  • The purchase order financing company pays $70 to your supplier directly. counting on the circumstances, payment is made by letter of credit or, if the transaction merits it, by wire transfer. Note that payment to foreign suppliers must be made by letter of credit only.
  • Once the payment has been received, your supplier manufactures the products.
  • The goods are delivered to the customer, who inspects and accepts them.

At now, you’ll invoice your customer. The transaction can proceed in one of two ways. you’ll factor the invoice and use the factoring proceeds to pay the purchase order financing company and shut that line. The transaction would then proceed as a standard factoring transaction. Alternatively, if factoring isn’t an option, the transaction can settle once your customer pays for the end goods.

The difference between purchase order factoring and traditional bank financing is that purchase order factoring bases its credit decision on the financial situation of your client, and a bank would be watching your finances alone no matter any purchase order promising future income.

Purchase order factoring can remove barriers to growth that trying to get traditional financing might cause. It also features a generally higher turnaround in processing than traditional commercial loans. Payment is made to your suppliers, factor receives payment from your customer, and your profit is paid on to you.

Generally speaking, your company may be a good candidate for order factoring if all the subsequent are true:

  • You buy then resell products with none modifications or customizations
  • Your company doesn’t directly manufacture the products that you simply sell
  • Your gross margins are a minimum of 20%
  • Your suppliers have a good track record of delivering products and are in good financial shape
  • Your customers have good credit
  • Your purchase orders are non-cancelable and haven’t any consignment or guaranteed sale terms
  • Your orders are for a minimum of $100,000

As you’ll see, purchase order factoring has very specific requirements and may only help a narrow set of consumers. Order factoring helps resellers/distributors that have received a sale order exceeding their current funding abilities and wish financing to satisfy it.

About Abram Jayce

Check Also

An Exclusive Promotional Item To Upgrade Your Business

Getting updated with current trend is an appreciation and drives confident to next level. If ...