5 Reasons to Consider Purchase Order Financing for Your Small Business

Entrepreneurs who have been running a business for some time are no strangers to cash flow issues. Because of that, financial institutions have created innovative ways to help business owners raise their company’s working capital quickly. This resulted in a better financial performance that eventually led to the success of many companies. One of those many financial options today is purchase order financing.

In fact, many successful companies have applied for this type of financing to help them fulfill their customer’s orders. In essence, PO financing is a type of financing where the lending companies pay the suppliers on behalf of the seller. This allows the sellers to accept and fulfill large orders from their new and existing customers without having to worry about how they will pay for it. Purchase order financing provides the perfect way to cover supplier costs and accept new orders.

Why Consider PO Financing?

Purchase order financing is an innovative financial solution for some businesses. It gives the business more capacity to grow without having to deal with the stress of how they’ll do it. Here are even more reasons why you may want to consider applying for PO financing:

  1. You Handle Large Orders

One of the qualifications of PO financing is that you must be a company that handles large orders from other big businesses or the government. Large purchase orders can cost a lot of money and sometimes, your company’s cash flow may not be enough to fulfill an order.

This may result in you deciding that you will not be able to fulfill the orders since you won’t get paid until the orders are delivered. However, by applying for purchase order financing, you can accept big jobs since the lending companies will let you borrow the money you need to fulfill the order. This lessens the likelihood of businesses having to turn down clients.

2. It Pays Your Suppliers on Your Behalf

It can be stressful and frustrating to decline orders from loyal clients because you lack the resources to fulfill it. This kind of scenario is quite common because some suppliers won’t take on a job without upfront payment.

And since you’ll most likely not be getting paid for the orders until 30 to 60 days after it’s fulfilled, there’s no way you can come up with enough cash to pay your supplier.

Fortunately, PO financing is specifically designed to help business owners who lack the cash to fill orders. In a scenario such as this, PO financing becomes a priceless resource. 

Assuming an application from a business is approved, the lending company forwards the money directly to the supplier. Once the supplier receives payment, they then begin to fulfill the large order of the business.

3. You Don’t Need to Come Up with a Hard-Asset

Unlike other financing options, lending companies don’t need a hard-asset to guarantee the loan. This means you won’t have to present something that the bank can seize in the event you fail to repay the loan.

Purchase order financing is considered non-recourse. What this means is, if customers don’t pay their invoices, the lender shoulders all the losses. This type of scenario usually happens if the customers aren’t satisfied with the product or goods are damaged or destroyed during shipment.

Essentially, as a borrower you won’t lose money in the entire process. But of course, a word to the wise is to check a lender’s policy for non-payment, in order to be sure.

4. You Can’t Qualify for Bank Term Loans

Bank loans often have strict requirements when it comes to loan applications. That is why some start-up businesses can’t qualify for traditional bank term loans. As a result, most of them turn to other financing alternatives in an effort to acquire the money they need.

With PO financing, the applying company doesn’t need to have a stellar credit history in order to qualify. Lending companies are much more interested in the creditworthiness of your clients since it is they who will be required to pay for the loan. It is for this very reason, many companies with average credit find PO financing a better option than term loans or other types of financing options.

5. You Won’t Have to Chase Your Clients for Payments

Lending companies may or may not allow you to handle your client’s payment yourself, depending on the terms. But since clients will typically choose to pay for their order over time, lending companies may purchase the invoices from you and collect the payments themselves.

This type of arrangement is called invoice factoring. It takes a lot of responsibility off your shoulders. With the lending company doing chasing the payments, all you need to do is to wait for the balance to be forwarded to you, while focusing and directing your energy on finding other new ways to grow your business.

Purchase Order Financing for Your Small Business

There are a lot of reasons why you should consider purchase order financing for your business. But in general, the funds you receive from the lending company will allow you to take on more orders, thus increasing your company’s reputation and solidifying your customer’s confidence in your business.

Image Credit: Business Financing via Freedomz/Shutterstock

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