One thing that can prevent a small business or startup from reaching the next level of success is the inability to purchase materials needed to fulfill large orders. The customer is hiring and the demand is there for the taking, but the funds to turn that order into a tangible product are not. The situation is a Catch 22, the demand is there to help you grow your business, but the funds are not available to do what is necessary to satisfy that demand. A startup with this kind of problem would benefit from purchase order funding.
What is Purchase Order Funding?
Purchase order funding is a type of financing where the lender loans money based on existing purchase orders in order to make it easier for the business to fulfill those orders. Borrowers can secure the amount needed to fulfill any order requirements such as raw materials, staff, extra equipment, and anything else that might be needed. This means the cash is secured to get the work done and once the customer pays, the lender gets their money back with interest. There are two types of purchase order funding available: work in process funding and finished product funding.
Work in Process
This type of purchase order financing is rare but some finance companies will allow the terms if there is an established relationship with the business. This type of funding provides funds for the purchase of components necessary to make the product or outsource to a 3rd party.
Finished Product Funding
This type of financing is much more common and is essentially the finance company buying a purchase order from a business and then the customer pays the finance company. This type of funding allows the business to continue fulfilling orders without having to wait for an infusion of cash from the customer.
What Are The Pros & Cons of Purchase Order Funding?
The biggest benefit to small businesses is purchase order financing eliminates the need for established credit. The lender doesn’t look at the credit of the provider of the good or service, but rather the customer and their ability to pay the invoice.
Another benefit is a quick infusion of cash when it is needed. Small businesses can quickly become overwhelmed with orders that can’t be fulfilled because of a shortage of funds. PO financing offers the business the money necessary to fulfill the orders and deals with the payment of the end consumer, leaving the company free to work on the next order.
An additional reason for a startup or business with bad credit should apply for purchase order financing is that the owner of the business does not need to put up personal collateral or put their own credit on the line. The funding is based on existing business and not past history.
While this funding is a great option for small businesses, there are some cons to consider such as the high rate of interest and the need to have existing purchase orders secured by credit-worthy clients.
What Kind of Businesses Are Most Ideal For This Funding?
Small businesses that are struggling with bad credit and not able to secure a traditional bank loan can benefit from this type of funding. The application is not based on past credit but rather on existing purchase orders and money can be secured quickly when it is needed.
Another type of business that should take advantage of this funding is seasonal businesses. These are companies that make their profits during a few months of the year so cash flow is erratic throughout the year. With purchase order funding, the money is there during the busy season and the business can pay it back when they have the cash in hand.
Whether your business is just starting up, has bad credit, or only makes money seasonally, the purchase order financing option is definitely something to consider to help grow your company.