Would getting a huge order from an important customer be the best thing that could happen to your business, or the worst? Turning it down for lack of adequate financial resources not only loses the order, but could lose you the customer for good. Fortunately, there’s a way to overcome that lack of finances and set your company up for rapid fire growth – purchase order financing.
Purchase order financing (or PO Financing) comes into play when traditional bank credit is not available – your company is too new, small, under-capitalized, et cetera. It works by considering your purchase order to be collateral, and providing a letter of credit straight to your supplier. Your supplier will usually ship directly to your end customer (who must be a trustworthy, established business or government entity). When your customer makes payment, the transaction is settled and you receive the lion’s share of the proceeds.
Start-up resellers and wholesalers without a long history of profitability can use purchase order finance to fund a large order and spark significant growth. It probably won’t work for you if your profit margin is less than 15%, and it is not designed for service businesses, only hard goods.
So keep purchase order financing in mind when that huge order comes in. It might be the best thing that could happen to your business.