Taking the Next Step: The Benefits of Purchase Order Financing
Small businesses can often encounter difficulty when looking to advance their service area or take on new projects that require some investment. With customer payment terms, outstanding invoices or limited daily intake, finding the cash or letting go of reserves is a challenge in a competitive and sometimes fragile market. In these moments, your company may turn to purchase order financing.
There are many ways small businesses attempt to procure cash, all of which have their pros and cons. Although small business loans are the most advantageous, with regard to cost effectiveness, they can be tough to obtain without the right line of credit, collateral or even income stream. Factoring is another option for companies needing quick access to capital, and while it is effective and immediate, the rates can be a challenge for fledgling businesses. However, in situations where you might be on the verge of losing a contract because you don’t have the labor pool, materials or start-up costs, it could be your best option. Granted, although you will lose some profit on the invoiced accounts you sell, there is potential to bring in even greater return with the new opportunity.
You may also find that your growth opportunity will settle their account with you long after your debts to suppliers are due. You may not want to risk being behind with your primary material providers, but yet you can’t afford to lose a new account. An alternative to factoring is purchase order financing. In some ways, this process is similar to factoring but yet is more logical in light of the big picture. In this situation, one company will settle the purchase costs with their client’s supplier on orders that were placed to fulfill job requirements for a customer. Unlike factoring, this works like an advance and does not always cover 100% of the purchase price. The company providing the purchase order financing then collects the invoice from the original customer needing the order. The lender makes its money through fees charged to company in need. These are taken from the collected invoice amount, with the rest refunded to company.
For companies who might have negative credit ratings, this is a potential game changer. The lending company doesn’t take into account the credit history, as the focus is on the profitability of the purchase order. Although extremely useful for situations requiring quick access to cash, thoroughly weigh the benefits against the fees and costs before assuming this is the best option.