Invoice factoring has long been a mainstay in the apparel business. If you are a distributor, when you supply clothing items to a retail store they can opt to pay you in 30 days—if you’re lucky. Sometimes the waiting period can be 45, 60 or even 90 days. Since you need the revenue from the sales as working capital for your next deals, you can partner with factors which provide immediate financing for these accounts receivable. But sometimes even that kind of financing isn’t enough, but with PO finance apparel companies can get the working capital they need. Purchase order financing is considered as a creative way to raise capital in order to meet a new large order.
What is PO Finance?
Essential, in PO finance apparel companies can get the money they need by using the purchase order as a form of collateral. The lender considers the credit of the customer who made the purchase order, and then calculates if your profit margin warrants the use of purchase order financing. If your customer, such as a well-known retail store, has a good reputation for paying their dues and if your profit margin is high enough, then you get the line of credit you need so that your supplier can provide you with the goods you require.
When Should You Get Purchase Order Financing?
In most cases, before applying for PO finance apparel companies should still try to get a traditional bank loan. Yet in reality, very few banks can get you the money you need quickly enough. Either the bank will be very reluctant to give you the funding you need, or their entire loan approval process is so slow that it won’t give you enough time to fill the order within the schedule indicated in the PO.
So if your company has a very small window of opportunity and you have no time to waste, you may as well apply for purchase order financing immediately. The process goes by more quickly, and this gives you the time you need to meet the specified delivery schedule requested by the customer.
Other Definite Advantages of PO Financing
The advantages of PO financing are well-known:
- You have a better chance of getting the money you need compared to securing a loan from a bank.
- The entire process is much quicker, so you don’t waste time in what may turn out to be a futile effort to gain the financing you need.
- The amount you need is based on known factors specified on the purchase order.
In many cases, when you apply for a loan you try to estimate the amount of money you need for working capital and for business growth. But with PO financing apparel companies can get their money on a “as needed” basis. Since you can easily calculate how much you need to have to pay your supplier, you don’t have to make a mistake in the amount of money you can ask for.
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If you have a small business, then you need a plan for growth. That’s the way it works, even in the apparel industry. You try to secure new contacts and perhaps move into new markets. You try to provide more products and add new ones. And of course, you need to make sure that you have the capital to fund your business expansion.
This is where some apparel distributors can have a problem. For example, let’s say you’ve been doing a good business supplying garments to retailers in your area. Now that you’ve established your expertise, one customer now asks for you to supply a volume you’ve never done before. You know you’ve got the chops to arrange the deal to the customer’s satisfaction, but your problem is that you may not have the capital to fund this business opportunity.
Of course, you’ll try to get some money from your bank. After all, that’s where your company’s bank account is. But banks, for all their improvements lately, aren’t really all that enthusiastic about lending to small businesses.
You’ll need to make sure that your business is in order, and that your credit rating is absolutely tops. That goes for your personal credit rating too. And then they drag their feet before you even get your money—if you get your money. That’s a very big if.
So if you get a big order, what you need to do is to use that particular purchase order to get the money you need. With PO finance apparel distributors should know how it works. This is the process:
- You get the huge purchase order. Instead of saying no to your customer, you say yes. This is the growth you’ve been waiting for, and it’s an opportunity not to be missed, especially if it offers a very nice profit margin.
- You approach the PO financer. Some lenders actually specialize in PO finance apparel deals. You tell them about the order and they ask for some pertinent details about the deal.
- They check out the opportunity. They’ll first see if the purchase order is real, because there are some scammers about who fake purchase orders to get some money. Then they check out your customer’s ability and willingness to pay the order, as well as your supplier’s ability to supply what’s been asked for. There are some other factors, but these are crucial.
- You get the money you need. Actually, the money doesn’t really go to you at all, but directly to your supplier. Often this takes only a couple of weeks after you first contact the lender. It’s a stark contrast to how banks operate, since banks consider two weeks as part of the initial stages of the loan application.
- The supplier makes and delivers the goods. The lender oversees this stage too, to see that everything’s going according to plan.
- Your customer receives the goods. When they do, they pay the lender.
- You get your profit. The lender then takes out the amount they invested plus a small fee for their services, and then you pocket the profit.
That’s how the PO finance apparel deal works. It’s really that simple and that easy.