Difficulties with cash flow hamper the growth of numerous small businesses. This can be especially problematic if you receive an important order but your company has insufficient funds to fill it. One solution that can resolve this dilemma is purchase order financing. Here is some information that can help you determine if this financing method is right for your situation.
The Basics of Purchase Order Financing
When you utilize purchase order financing, the order you need to fill serves as collateral for a loan so you can buy what you need from suppliers or manufacturers. Normally the lender provides most of the payment but you are expected to contribute as well. The lender may directly pay the supplier or manufacturer or open an ongoing line of credit with them.
Purchase Order Financing Steps
If you receive a lucrative order from a client but don’t have the funds to cover it, you could refuse or delay the order and risk alienating your customer. Alternatively, you can fund your order with purchase order financing. First, you provide your supplier with the details of the order and receive an invoice. Next, apply to a lender for funding. The lender pays most or all of the cost to your supplier, and you pay whatever balance is left. The supplier makes the delivery to your client, which you then invoice. Your client will send payment to the lender, who subtracts their fee and the loan amount and then sends the balance on to you.
Advantages of Purchase Order Financing
Purchase order financing makes it possible to accept orders you would otherwise have to refuse. You can qualify for this form of funding even if your credit is not good, because the lender is more interested in your client’s credit than yours. Payments for the loan are not on fixed schedules, but rather depend on when your customer pays. These loans are generally not guaranteed; if your client does not pay, you are not responsible for the debt.
For more advice on purchase order financing, contact Northgate Capital Finance.