Purchase order financing is growing in popularity in the commercial sphere, rapidly energizing modern businesses. Can it help your small business, too? The answer depends on several factors, such as the industry you operate in and your company’s goals. That said, PO financing is often a great way to get funding for business growth.
What Is Purchase Order Financing About?
You probably guessed from the name, but purchase order financing revolves around customer purchase orders. Different lenders have their methods of financing, but the process generally works similarly to outsourcing purchases to a third party.
In other words, you submit valid purchase orders to the lender to get the products needed to fulfill client orders. The lender doesn’t send the funds to your business, but instead directly to suppliers. Afterward, the finished goods are shipped to your customers. You handle all of the billing, but the lender takes care of making sure your clients get the items they need.
Some lenders set up PO financing similar to a loan. In this case, your business receives a cash advance based on the value of the purchase order. You need to coordinate delivery in this case, and then you simply deposit the portion of the funds corresponding to the lender’s share of the revenue.
What Small Businesses Are a Good Fit for PO Financing?
To take advantage of purchase order financing, you primarily need purchase orders from established clients. Sales companies, resellers, importers, wholesalers and similar small businesses can get this type of funding easily. Manufacturers can make it work as well, as long as they’re experienced with work-in-progress methods.
Why Do Modern Businesses Use Purchase Order Financing?
There are many reasons why PO financing can be attractive for business owners. For one thing, the requirements are much easier to meet than getting a traditional loan. You don’t need an excellent credit score, tons of savings or perfect cash flow to qualify.
These easier requirements make operations simpler for companies of any size. Many manufacturers use a variation of PO financing to get raw materials for client orders. This financing helps the businesses maintain plenty of working capital on hand instead of using it all up for purchasing.
Because the company’s credit score is less important, even startups can often qualify. Small businesses that have gone through credit issues aren’t disqualified, either. This funding can be a lifeline to rebuild the company’s operations and finances after difficult times.