Knowing the basics of purchase order financing is an asset to almost any small or medium sized business owner. In this article, Exolta will discuss exactly what purchase order financing is, the benefits, drawbacks, who can benefit the most from it, and which businesses would be most likely to qualify for it.
What is purchase order financing?
Purchase order financing is another way to get a loan for the capital you need to finance the supplies, production, and shipping of a product after you have received a purchase order from a buyer. Once you produce the finished goods and have received payment, you can then pay off your invoice to the company who provided you with funding.
This is a perfect solution for small start-up businesses that have orders coming in but don’t have the finances required to order supplies, pay their workers, and ship the finished goods. This would also be a great opportunity for small to medium sized businesses that have found themselves with a sudden leap in volume of customers or are blessed with a very large order.
Who can benefit from purchase order financing?
- Purchase order financing is great for businesses who usually do not have the funds for large orders that could rapidly accelerate their sales and turn their product into a household name. Imagine pitching your product to a major retailer, receiving an order from them, and then not being able to produce the goods needed because you are short on funds. Purchase order financing could save you from this heart-breaking, and business-breaking, blow.
- A company who has received an order so large that they would need a six-digit loan. A purchase order financing company is not there to finance every single order so that a business does not have to spend any money up-front, it is merely a means for businesses to get the funds they need for an order that would otherwise be out of their reach financially.
- Only those who are reselling a pre-manufactured product that they have to purchase in order to send to the buyer, such as drop shippers, or are producing a product to sell may be eligible to receive purchase order financing. For example, if you are selling a service, you would not qualify to receive purchase order financing. Although it may take capital you do not have to employ staff to perform the service, it would still not qualify under most company guidelines.
What are the drawbacks of purchase order financing?
There are few drawbacks to receiving purchase order financing, however, there is one major qualification that could potentially stand in your way. When a company grants you funding, they assume they will be paid after your customer receives the finished product and pays you. Because of this, many funding companies will check the credit status of your buyer(s) to be sure that you will not have payment issues and be left without the money to pay your invoice. Purchase order financing companies are not only taking a chance on you, they are taking a chance on your customers as well. They are the ones carrying the real risk if the deal goes sour. Knowing that your customer is credit worthy gives the company the peace of mind to lend to you.
What to look for in a purchase order financing company
It goes without saying but you need to find a company that is right for you. These guidelines may help you better understand what type of company you should apply for credit with:
- Find out what their minimum and maximum funding guidelines are to ensure that they meet your financial need. If a company only funds loans that are in excess of what you are looking for or has restrictions that are less than what you need then you are best moving on to another lender.
- Find out what other eligibility requirements they have to ensure that you do qualify under their guidelines before you waste any time applying for their loan.
- Find out what length of time you have to repay the loan and check to see if it meets with your production and billing schedules to ensure that you will have the funds in time.
- Once you have found a company that works for you, make sure that they have a fee or interest rate that your company can both afford and be comfortable with in the context of the margins on the sales you are funding.
In the world of loans and financing, purchase order financing may be a small business’ best ally. They will usually have repayment terms that allow time for production of a product and it is the fastest way to receive financing without losing any investment in your business. Also, since they will check into the credit worthiness of your buyers, they may save you from producing a product for a buyer best avoided. All in all, purchase order financing is a way to finance a large order that may get your product into the hands of a grateful customer.
Looking for more information about financing working capital? Contact Exolta here for a confidential discussion.Download this article as a PDF