As a business it is important to know whether or not your sales contract will qualify for purchase order financing. First, what is purchase order financing for international orders?
Purchase order financing involves borrowing against the written sales agreement that has been established by the buyer and the seller. The sales contract is also called a purchase order and will detail the product or services that are to be sold by the vendor and will specify the shipping and payment terms, delivery dates, and other information that is relevant to the sale. Financing for purchase orders is available for both domestic purchases and international purchase contracts.
Here are some tips for determining whether or not your purchase order will qualify for financing.
Demonstration that you can Complete the Work
Financing for purchase orders will hinge on the company’s ability to complete the work so that the purchase order will be earned. Showing that you have experience in completing similar types of work will show the lender that you are capable of completing the job that you have been hired for.
Proof the Customer will Pay
Even more important than proving your business will be able to complete the work is proving that your customer is going to pay. You will need to show that your customer is financially able to pay the bill or that they are protected by some type of financial guarantee such as from an international recognized letter of credit from a bank, a bond issuance, or some other type of credit enhancement. This will help prove that you can pay back the purchase order finance loan.
The best customers include governments and companies that are large and publicly traded. A large private corporation can be a valid customer as well. International customers that have their finances validated through a letter of credit from a bank that is recognized are good customers as well.
For a larger construction project a performance bond is often used to help minimize the risk for the customer. This is also a method used to ensure that you are paid for the work that is completed. For subcontractors one of the best ways to handle the situation is to have the payment made to the contractor as a joint check that is paid to both your company and theirs.
International projects will typically have purchase orders that are backed either by a letter of credit or some other type of collateral that is predetermined. Once the purchase order is borrowed against the buyer will not pay the seller directly. This leaves the lender to rely on the seller for repayment.
Is Purchase Order Financing Worth the Cost?
Generally speaking, purchase order financing is only going to be ideal for margins that are more than 20%. In order to calculate your gross profit margin you will divide you anticipated gross profit by total revenue to see if the financing is worth the cost.
Need Purchase Order Finance for your International Orders?