Factoring Trade Finance: Tips and Secrets of Purchasing Order Financing for Canadian Companies Looking for Financial Trading


Tips and Secrets of Purchasing Order Financing for Canadian Companies Looking for Financial Trading

The nightmare of your worst business just happened. You get an order/contract! Now what?!

Purchase order financing is a great tool for companies that have unusual purchase orders and financing needs for sales contracts but potentially cannot access traditional financing through their own bank or capital resources within their company. How does trade finance work, does your company qualify, how much does it cost, and how does it work? Good question, now let's explore some answers!

Purchase Order Financing

Usually, Canadian companies that are looking for this type of financing are distributors, manufacturers, or maybe wholesalers. Various industries in Canada have access to this type of financing, but certainly, they tend to be typical companies that need help.

Your need for financing purchase orders arises from what we call the classic working capital gap. What do we mean by that? This is the case for your supplier who needs payment in advance or within 30 days, with your company unable to generate funds for payments and therefore cannot fulfill large purchase orders and contracts as you wish. Your supplier requests your payment in advance or 30 days, and you will not receive payments for at least 60-90 days, it may depend more on your build cycle, etc.

Of course, you do not want to reject orders or lose competitive market positions.

The obvious solution for large amounts of low-cost funds is Canadian banks, but our observation is that many companies cannot meet bank requirements for this type of financing to occur. If your company grows, is profitable, has a clean balance sheet and strong historical cash flow and history You certainly have a strong opportunity to meet bank requirements, but that usually doesn't happen, certainly in the number of clients we talk to who are looking for alternatives to challenges their growth!

When you access financing you can feel comfortable that your supplier will be paid, and at the same time, you generally have access to all the funds you need. Typical purchase order financing applications take between 2-4 weeks to complete and involve basic financial due diligence on the ability of your company to fulfill orders, who your customers are (they must be creditworthy), and your appropriate supplier sources must be identified and examined. As simple as that.

So what are the basic requirements for P.O? Financing agreement? Naturally, your company must have a contract or order that cannot be canceled by your client. PO finance companies manage to pay your suppliers directly, which reduces all of your cash flows and working capital problems. The transaction is complete when you ship your goods and your receivables are generated on sale. At this time the purchase order finance company expects to be paid, and this is usually handled by your company to get money from receivables through banks or factoring facilities. Factoring facilities are a great partner for PO financing strategies because their use guarantees payments to your PO company.

Let's cover some tips and secrets about the cost of financing purchase orders - These are generally in the range of 2-3% per month in Canada, and that means you have to have a strong gross profit margin to be able to maintain financial costs. But let's be honest, let's say your company has made 750 thousand revenue over the past few years and you have finally got a large order from a major customer of 1 million dollars. Would you not give 2-3% of your profit margin to make a sale that is equivalent to business throughout your year? We think you should consider that positively! It is clear that the higher costs of this type of financing include the complexity and risks that financial firms must pay to pay for goods, wait to be paid, and have confidence that your company will fulfill contract orders.

It has been our observation with certain clients that the success of completing your purchase order financial transaction significantly improves your relationship with your main suppliers and of course customers, it is a secret benefit that is intangible but invaluable at the same time.

Is P O financing for everyone. Probably not. Could it be a solution to the main working capital needs if your business grows and cannot be traditionally financed - of course, we think so? Talk to a trusted, credible, and experienced purchase order financial expert to explore your options.

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