How to Use Purchase Order Financing to Your Advantage
As a small business owner, you understand the occasional struggles of volatile cash flow and the need for business funding when revenue cycles are insufficient to fund expenses. There are solutions for this common operational challenge. One option you may not have yet considered is purchase order financing. Purchase order financing is a financial arrangement where a financing company provides you a loan based on your orders so that you may meet the needs of your customers promptly. It is a commercial financing solution that provides capital to pay suppliers upfront while you await payment from your customer. Businesses can thus avoid depleting cash reserves or declining an order due to insufficient liquidity. This financing allows companies to accept large orders and adjust the loan basis as needed. If order volume drops, there’s no financial commitment to continue with the arrangement. The types of businesses that frequently use purchase order financing include manufacturers, distributors, and wholesalers.
More Accessible Than Traditional Loans
A traditional lender is bound by government regulations and underwriting requirements. Loan requirements typically include collateral, three years of financials, strong credit scores, and other stringent guidelines. A purchase order financing company, on the other hand, is an alternative lender that creates its own lending rules and primarily focuses on verifying the quality of the contract. In some arrangements, your lender and supplier may also have an established line of credit, further facilitating your business operations. They also review other factors such as gross profit margin, production volume, and product appeal. With purchase order financing, you can increase or decrease growth capital according to your fluctuating needs.
It’s Highly Flexible
As opposed to many traditional loans, for which you’ll be on the hook even if your business goes under, with PO financing, if you don’t get paid by your customers, you won’t have to pay back your loan. This makes the level of risk significantly lower for you, as you only risk however much money you put in. Additionally, since PO loans are not usually paid back on fixed schedules, they give you more flexibility than a typical business loan.
It’s a Great Short-Term Solution
Since customers typically pay their invoices within a month or two, you won’t have to worry about accruing exorbitant fees. If you’re looking for a short-term cash solution, this could be a good option.
Purchase order financing is one financing option that allows you to get through a cash crunch and cover your expenses by giving you funding based on orders. If your company is low on cash flow but you still want to keep your customers satisfied, this could be the right option for you.