Here’s the good news: Your business has just been awarded a lucrative contract.
Now for the bad news: Cash flow challenges mean you don’t have the money on hand to purchase the supplies or goods you need to fulfill that contract, add to your own bottom line and grow your business.
That leads to the following quandary being faced by many small and mid-sized businesses today. Turning the order down means not only a loss of revenue, but can lead to customer distrust and the perception that your business is on shaky financial ground and potentially unable to fulfill its obligations in the future.
So, what can you do?
Consider using purchase order financing as a means of buying what you need to fulfill money-making contracts while growing your business at the same time and not using your own money.
What is purchase order financing?
Purchase order financing is a short-term financing option that is available to manufacturers, distributors, wholesalers, resellers or importers/exporters. It provides working capital for the purchase of goods and services that you are selling.
Simply put, purchase order financing is a payment made to a supplier on a buyer’s behalf that uses a purchase order for goods to be supplied and delivered by the suppler to the buyer’s customer as a form of collateral.
Requirements for purchase order funding and how it works
- Clients are usually required to provide between 25 to 50 percent of the purchase price of the supplies they need in order to qualify for purchase order funding.
- Purchase order financiers will then provide credit lines to clients from anywhere between 40 to 70 percent of the value of the purchase order.
- The difference between the amount of money that you as a business owner require to fill your order and the amount above that a purchase order financier will require can be used by you to purchase additional inventory.
- Some purchase order financiers require what is known as a factoring company to be involved in the transaction. Factoring companies collect on the purchase order directly from your client – meaning that the purchase order is considered a financial asset and not a liability.
- Purchase order financiers by charging various fees, which are taken out of the collected purchase order, to their clients. You get what is left over after the purchase order financier has collected those fees.
Purchase order financiers can also opt to open up a line of credit for cash-strapped business owners who may have poor credit or few assets to obtain the supplies they need to generate sales.
Purchase order funding involves several steps:
- Your business receives a purchase order from a client.
- The purchase order financier pays the required upfront percentage your supplier requires in order to provide you with the goods you need.
- Your business receives those goods and fulfills your order.
- Your client pays you for your services and your business pays the purchase order financier off.
Advantages of purchase order funding
- Purchase order funding provides you as a business owner with the money you need to fulfill large contracts and orders that exceed your current financial capability.
- You aren’t using the cash you have on hand in order to grow your business when you utilize purchase order financing, meaning that you will realize your profit margins faster and grow your business more quickly than you would otherwise be able to do.
- This short-term financial solution allows you to build up your inventory and financial resources so you can accept and fulfill even larger orders in the future.
Purchase order financing is also generally easier to obtain than traditional bank financing and does not require companies to have perfect credit. The creditworthiness of the company you are doing business with is considered and not your company’s own.