How Can Purchase Order Financing Help Your Business?
It is sometimes hard to grow your business to the next level if your business is not prepared by having large amounts of cash available to finance the new business. Purchase order financing is a specific kind of financing that can help a business that has to deal with large purchase orders and doesn’t have the cash on hand to process such a big order. It may be just the thing to help your business with a similar problem.
How Does Purchase Order Financing Work?
If your business would suddenly receive a very large purchase order that is larger than any you have ever fulfilled, you will need a large amount of money to purchase the goods to fill the order. But you have not been paid for the order yet, so where will you come up with the necessary cash? This is where the financing of the purchase order comes in.
The lending company will check out the credit rating of the customer who sent you the large purchase order. If the lender feels that the customer is creditworthy, the lender will agree to lend your business the money to fulfill the order. The lender will also lend you the money you need to ship the order because that could be a large sum of money, as well. There are certain costs that your business will have to cover, such as insurance, shipping duties and inspection costs.
Once your customer receives the shipment, your company will bill the customer for the order. If the customer pays right away, you will be able to pay the lender back. If the customer pays on terms, you can sell the invoice to the lender at a discount, using this money to pay back the lender. The lender will then collect the payment from the customer according to the terms agreed upon.
What Types of Companies Can Use Purchase Order Financing?
Purchase order lenders only want to deal with one third party. So they want the business that is borrowing the money to be either a reseller or a manufacturing company with only one supplier. Some industries that have businesses that fit this description are consumer products, sports equipment, clothing, non-perishable foods and electronics. The companies that need this type of financing are usually startups or just starting to move up a level to larger orders.
If your company is at a stage where you want to attract larger orders, this type of financing will help you over the hurdle of not having enough cash and will allow you to grow your business to the level you want.