There is nothing more frustrating for a sales manager or business owner than not being able to afford to make a new sale. Meaning, the opportunity is there for the taking, the purchase order is there, if only you had the necessary funds to pay your suppliers. If only you could deliver!
Meeting supplier payment demands is one of the biggest challenges that owners and their sales people have. Your suppliers want to get paid immediately or upon delivery. Your commercial clients want to pay you 30 to 60 days after receipt. The math does not work and you’re left in the middle. Unless you have a well heeled bank account, your options may appear limited.
If you are like most business owners, your next call will be to your banker. And unless your business has solid financials, three years worth of audited financial reports and a lot of collateral, there is little chance that the bank will offer any business financing. Even the now common letter of credit requires the same bank underwriting criteria as a loan. This puts it outside the reach of small and medium sized companies. So, where can you obtain working capital if you have a strong sales potential but lack the funds to turn the potential into reality?
There is a little known form of financing that allows you to use your purchase orders (from good customers) as financial collateral. It’s called purchase order financing and your bank probably does not offer it. Purchase order funding enables you to deliver on your large orders from your best customers and enables you to make those sales. It’s easy to qualify for and is available to small and medium sized businesses. It is available to those businesses that have no apparent collateral, except a roster of strong customers.
The arrangement is fairly simple. Once you have a purchase order, the financing company provides your suppliers with a letter of credit that guarantees their payment. With the letter of credit in place, your suppliers can deliver the product to your clients, usually by drop shipping it, and you can close the sale. Then it’s a matter of waiting 30 to 60 days for the customer to pay their invoice and the transaction between you and the financing company is then settled.
Purchase order financing can be a great tool that allows distributors, wholesalers, product suppliers and trading companies to grow beyond their expectations, by capitalizing on their purchase orders.
Now the question is – if you had unlimited working capital, how many sales could you close?
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