Purchase Order Financing Keeps Your Orders Filled
One of the biggest catch-22s for a new business is too much success too quickly. There’s the great feeling of being successful. Then there’s the can’t-sleep-at-night worry as you realize that to make more finished products to meet the demand you’re going to have to buy large amounts of raw materials. Cash flow can become non-existent and sometimes it’s a question of meeting payroll or buying material. That question doesn’t have to keep you up nights if you use purchase order financing. Read on to see how purchase order financing can free up your cash flow and keep your customers happy.
What Is It?
Purchase order financing, or PO funding, is a type of short-term loan specifically for the situation described above. A third-party funding source will provide you with the funds to get your raw materials based on purchase orders you have already received. The funding you receive depends on the number of purchase orders you have in hand and the credit-worthiness of your buyers, not you (which is especially helpful for a new business without established credit). Once you deliver the final products, the payment for those POs goes to your lender.
Remember that these should be short-term loans used in specific circumstances. If you are just generally looking for a small business loan, your rates will be much higher than a bank or the SBA.
How Can It Help?
Whether you’re a brand new business experiencing unexpected growth, or you are an established business with an amazing growth opportunity, PO funding can help. The first difference between it and a traditional loan is timing. While applying for a loan can take weeks or even months of paperwork and wait for approval, PO financing is geared specifically to fast turn-around. That timing allows you to keep processing orders, or take on that next-level project you couldn’t have handled otherwise. If you have a market-dependent or seasonal business it can also benefit you through the short-term nature of the loan. You won’t have to plan for repayments during months that you know your business will be slow. If your business has struggled in the past and you need to rebuild your market share, these loans that are less tied to your own credit history can also be a building block to better credit.
Like all loans, it’s important to determine whether the repayment costs of PO financing are worth it for your business. If it fits your model, the extra wiggle room in your cash flow can take your business to the next level.
