It's a problem that many small businesses want to have. Rapid growth to the point of almost having too much business. So what happens in these situations? Your sales can quickly outgrow your cashflow.
If the cash isn't coming in fast enough, you won't be able to purchase the goods at wholesale or the materials to manufacturer your products needed to fill an order. This can be crippling when a large deal is on the line.
So what are your options? You can turn down the order, but who wan'ts to do that. You could ask the buyer for an advance, which isn't likely. Maybe you are thinking that you could go to the bank and get a loan. Unfortunately, that isn't very likely in today's lending environment. It also takes a while to get a loan funded anyway, so the opportunity might have passed you by before you could get the money anyway.
There is another option though, and it's called purchase order financing. It's a product that provides financial assistance for your business, though it is not a loan. So how does it work?
- You receive a large purchase order from a customer that you are unable to financially fufill.
- You seek assistance from a purchase order financing company, similar to a factoring company.
- The lender will open a letter of credit to pay your supplier or vendor of your products.
- The order is fulfilled, and deliverd to your customer.
- The customer remits the payment directly to your purchase order financing company.
- You then receive the remaining profit, minus the lender's fee for financing the purchase order.
As you can see, the process is simple and it's actually pretty clever. These lenders are leveraging their cash ability to provide relief for your business when it needs it to grow. It's a win-win situation for all parties involved. They receive a nice fee from the transaction, while your business get's to perform a sale that it normally wouldn't have been able to fulfill.
There are many other benefits to it as a service also. For example, purchase order financing doesn't require a lengthy business history or a high credit score to secure. They simply require your business to be free of serious financial, tax, and legal issues.
As long as your cusotmers are established, and your manufacturer or vendor is likewise capable of fulfilling the order, you will be approved.
So to break down what the purchase order lender will look for:
- Your business to be free of major financial tax and/or legal problems.
- A reputable supplier or manufacturer that is capable of fulfilling the order on their end.
- A customer that has demonstrated the ability to pay the invoice without issue.
So who finances their purchase orders? Well, the answer is that almost everyone does. There are many businesses of all shapes and sizes that are across many different industries that utilize the service. Whether you're a clothing manufacturer, or a distributor of fragrance and beauty products, you can probably benefit.