PO funding gives you the ability to have goods available for your clients before an invoice is generated and enables you to make sales that exceed your current financial capabilities. However, if your business has pre-sold goods but not enough credit line to acquire the goods from your supplier then Vendor Guarantees are your best option.
What is PO Funding?
Purchase order financing (POF), also referred to as Trade Financing, is is a short-term commercial funding solution that boosts businesses’ financial needs when facing cash flow issues. The factor provides an upfront payment to the business suppliers for verified purchase orders so as to cover the business costs.
In fact, PO funding enables any business to have available goods for its clients even before an invoice is generated. If you are a product importer, reseller or distributor in need for working capital to deliver a large purchase order, then Purchase Order Financing can be the optimal solution to accommodate your business financial needs, not only to fulfill your orders but also to take advantage of growth opportunities. Therefore, PO financing gives you the ability you to make sales that exceed your current financial capabilities.
How does PO Funding Work?
POF is the best solution for any good-based business that lacks funds and struggles to acquire a bank loan. The lender pays your supplier for providing needed goods which allows you to perform the job for your customers in time. Once orders are fulfilled and payment received, the lender deducts its fees and then remit to you the remaining balance.
So as to qualify for Purchase Order Financing(POF), a company must have B2B or B2G customers along with having minimum profit margins of 15%. Moreover, the funding approval would depend on the creditworthiness of, and history with, both your suppliers and customers.
What are Purchase Order Financing’s Benefits?
POF is quite advantageous as it enables your business to fulfill orders that exceed your current financial situation and offers an easy application process.
Purchase Order financing benefits include:
- Up to 100% funding of your inventory cost;
- No added debts on your balance sheet;
- Ability to cover bigger orders;
- The credit facility grows with your revenues from creditworthy customers;
- Logistics expertise provided by the PO Funder.
What is a Vendor Guarantee?
A Vendor Guarantee also referred to as a Vendor Assurance, is an alternative to the Purchase Order Financing system. In fact, Vendor Guarantee is a quicker and less complicated version of Purchase Order financing and is mostly used with Invoice Factoring; which can help companies build credit with vendors. In fact, a Vendor Guarantee can help bridge the gap for any business that doesn’t qualify for Purchase Order Financing. If your business is also lacking enough working capital to cover your vendor expenses as well as the operational costs, then Invoice Factoring and a Vendor Guarantee is a strongly recommended combination that can solve your financial needs.
How Does a Vendor Guarantee work?
If your business holds pre-sold goods but is lacking enough working capital and credit, you would face difficulties buying the needed goods from your supplier. Therefore, a Vendor Guarantee would be your best solution as it is an agreement between all involved parties guaranteeing that the factoring company would directly pay off your supplier out of the factored invoices proceeds. Once the agreement is done, your business can get the required credit and have your vendors release the needed goods in order for you to cover your customers’ order and finally factor the invoices to enable your factoring company to pay your vendors out of the factoring proceeds.
However, in order for a Vendor Guarantee agreement to be in place, the following key points need to be fulfilled:
- Your supplier needs to agree to this process;
- Your suppliers’ payment is only guaranteed if you factor the invoices;
- Funds are remitted to your supplier once an invoice is factored;
- Once your supplier, the remaining balance goes to your business;
- A good track record with your suppliers is crucial.
In fact, a creditworthy factoring company can leverage against your accounts receivables through invoice factoring whereas a factoring company with excellent credit and the right experience can be able to directly work with your supplier in order to guarantee his payment. The factor would purchase your accounts receivables resulting from the order and pay your supplier before sending you the remaining balance. You will receive the remainder minus the factor services’ fees once your clients pay the invoice in full.
Having a good transparent relationship between all involved parties (your business, your supplier and your factor) is vital as your supplier is more likely to agree to this type of transaction if the relationship you are having is on point and he is comfortable to trust that payment will be received in time. As long as you have good relationships with your suppliers, vendor guarantees would always be an option for you to secure working capital in order to fulfill your orders and grow your business.
What are a Vendor Guarantee’s Benefits?
Vendor Guarantee is your best option for acquiring enough working capital as it is the cheapest and the less risky for your business, your supplier and your factor. The Vendor Guarantee benefits can be stated as follows:
- It is an irrevocable obligation ensuring payment for your supplier;
- Your supplier is constraint to supply the specified goods as per the contract;
- You benefit from your factor experience, support and industry knowledge;
- Create a more collaborative relationship that will benefit all involved parties;
- Regular review
- Ability to take on larger orders;
- Growth opportunities for your business.