Becoming a distributor for a large big box retailer – companies such as Walmart, Loblaws, or Rona– can be both a important opportunity and a major challenge at the same time. Most big retailers can place large purchase contracts, which are great for revenues. However, they also negotiate payment terms that enable them to pay your invoices in 30 to 60 days.
Larger orders coupled with slow payment can actually create cash flow problems, especially for distributors and resellers that are not well capitalized. In mild cases, these problems force you to juggle supplier payments to keep afloat. In more severe cases, it may force you cancel orders and leave suppliers unpaid for a very long time.
Paying suppliers in advance ties funds
For many companies, their biggest issue is paying their suppliers expenses. Most small businesses cannot get payment terms form suppliers, and therefore must pay for orders in advance or at delivery.
Matters can become more complex if you are dealing with foreign suppliers who need to be paid with a letter of credit. Most will want to see the letter of credit before they start manufacturing – and banks will only offer them after you post cash collateral. This, coupled with longer transit times, can also tie your funds for a longer period of time.
Supplier financing
One solution that has been gaining traction in Canada is purchase order financing. This solution covers your supplier expenses associated with large purchase orders from credit worthy commercial clients. It provides the financing that enables you to pay your suppliers, allowing you to fulfill large purchase orders. When used correctly, this form of supplier financing can be a game changer, helping you to capitalize on new and growing sales opportunities.
Transaction structure
The transactions are handled using a factoring company as an enabler. The finance company handles your supplier payment, usually by letter of credit. The transaction settles when your client pays for the goods, on their usual terms. Most transaction flow as follows:
- You submit a copy of the PO and order to the finance company
- The finance company reviews the paperwork
- The finance company pays your supplier
- Your supplier manufactures and delivers the goods
- You client pays, 30 to 60 days after receipt
- Transaction settles
Supplier payments
Most suppliers are paid using a letter of credit, especially if they are outside of Canada. An L/C is a financial instrument that guarantees payment to your suppliers, as long as they deliver the goods according to the quality and quantity specifications that you determined. Using a letter of credit minimizes the financial risk if your supplier defaults, and guarantees your supplier their payment if they deliver.
Lower transaction costs
Most po funding transactions have a higher cost that conventional business financing. However, one way to lower transaction costs is to combine it with an invoice financing line. Basically, this is done after your client receives and accepts the goods. You can use the proceeds of the invoice financing line to close the purchase order funding line. The transaction then continues as a conventional factoring transaction.
Benefits for small businesses
This type of supplier financing has a number of benefits for small companies. The most important one is that it allows you to finance very large orders that go far beyond your current financial capabilities. This is a critical benefit because large retailers often place large orders, especially if your product is selling well.
Also, the line has no fixed maximums. Rather, that size of the line is determined by the transaction that is being funded. The finance company will look at the credit worthiness of your client, the reliability of your supplier and your ability to execute the order.
What happens if my supplier has financial problems?
It is not unusual for suppliers that have financial problems to demand pre-payments for their products. They often do this because they need the money to be able to fulfil the order. Transactions that have suppliers who are financially troubled will often not qualify, due to the high risk of default. Remember that the objective of this solution is to finance your company, and not your supplier’s company. Why should you take on financial risk to help them?
Can my company qualify?
The requirements to qualify for po funding are simpler than those of conventional bank financing programs. The two most important ones are that your clients must have solid credit and your suppliers must be good. Aside from that:
- Your receivables should not be encumbered
- Your company must sell finished goods
- Your gross profit margins should be over 20%
- Your company should not have serious legal problems
- Your company should not have serious tax problems
Get more information
Are you looking for purchase order financing? We are a leading finance company in Canada and can provide you with a competitive quote. For information, get an online quote or call (877) 300 3258.