Purchase ordering financing is one of the most modern and novel ways for startup and small businesses to get their hands on some much needed cash and fast. Before you start jumping for joy, however, it is important that you understand what the system is, and whether or not it is right for you. Hopefully, the below will explain some of this.
Purchase Order Financing? What Is it?
Basically, it is a type of loan that you don’t really pay back. Rather, you sell a purchase order to a company and when you get paid for that, the money is sent to the purchase order financing company. This is a great solution, because it means you can raise the funds needed to actually produce whatever it is that you have created the purchase order for. Indeed, many medium sized businesses are unable to take on further orders until their previous ones have been paid for, so this solution is perfect for them.
Who Is it For?
- Small and medium sized business that do not (yet) have sufficient funds to accept large orders and really boost their own sales. It is these businesses that tend to need this type of money the most, because it will give them the opportunity to establish themselves and grow as a business. Through purchase order financing, they have a chance to achieve this.
- Companies that are reasonably established but suddenly receive an order that is larger than even they can manage. Instead of opting for an expensive bank loan that will cripple them for years, they can choose to use purchase order financing and have the order completed, again helping them grow their business as well.
- Drop shippers, who have to actually purchase something themselves before they can send it to their own clients.
Purchase order financing is not for businesses that sell a service rather than a product. This because they have no upfront costs that they have to meet in order to be able to deliver the service. Some will say that paying staff is an upfront cost, but this cost will exist whether they have an order or not.
While purchase order financing is a great option, there are some drawbacks. The biggest one is that the company that buys your purchase order will expect that you get paid, so that you can, in turn, pay them the money back. Because of this, a credit check will usually be performed on your client, so that the financing company can feel confident that they will receive the payment. A financing company is basically taking a double risk: they gamble that you will deliver on your work, and they gamble that your clients will pay you. Hence, if they find that your customer has a poor credit rating or a history of late payments, they may not agree to enter into a purchase order financing deal with you.