All businesses should understand the basics of purchase order financing, its potential benefits and pitfalls, and who might use it. Simply put, it’s a way to purchase finished goods or raw materials that will be turned into products that are resold and shipped, usually within a relatively short time frame. It is based on having a verifiable purchase order. Typically, the financing is issued, completed and repaid in less than two months.
What kinds of companies use PO financing?
PO financing is appropriate for many businesses: from smaller start-ups with sales orders coming in but without necessary capital to fulfill; to larger, more established businesses with unusually large orders or for a big new customer. Wholesalers, drop shippers and resellers frequently avail themselves of this option. PO financing provides the capital needed so supplies can be bought, product produced, and finished goods shipped.
It’s a great way to put your company on the map, or launch to the next level. More to the point, you can avoid turning down a deal for lack of access to funding.
What is the biggest potential negative to purchase order financing?
The single biggest stumbling point is also the reason purchase order funding is possible in the first place: approval is based on the credit, track record and trustworthiness of your customer. The financiers are in essence gambling on you, your suppliers, and your buyer holding up their end of the bargain – if anything falls through, they take the hit. So be sure that your trust in your customer is well placed.
Finally, partnering with a purchase order finance company needs to make good business sense for your organization. Consider:
- Fees and interest rates; the purchase order finance company takes a cut of your profits – not much, but you need to decide that it’s equitable
- Underwriting requirements, including minimum loan amount (it may be more than you actually need)
- Delivery time, billing schedule and other timeline demands (international transit times can be particularly troublesome here)
So don’t automatically say “no” the next time an order comes in that would normally be too big to handle. Consider purchase order financing – it could be the bridge to a bigger and more profitable business.