Keeping company cash flow strong is a concern of all business owners. However, sometimes unavoidable situations cause a temporary lull in cash flow. Under these circumstances, purchase order financing can provide the boost that your business needs. Here is what you need to know about this form of funding.
What Purchase Order Financing Is
Purchase order financing is a loan using your purchase orders as collateral. Although most lenders do not usually advance the full amount of the order, they typically cover a large portion of it and expect you to handle the balance. Some financing companies pay suppliers or manufacturers directly, while others establish lines of credit with suppliers.
The Basics of Purchase Order Financing
When your company receives an order but is unable to fulfill it due to insufficient finances, you have the option to refuse the business or obtain funding to pay your supplier. Once you put in your order to your supplier and obtain an invoice, you apply for purchase order financing. The lender pays for all or most of the order, and you pay the balance. After the supplier fills your order, you invoice your customer, and the customer pays the financing company. After the amount of your loan and lending fees are paid off, you receive the balance of profits from the lender.
The Advantages of Purchase Order Financing
Purchase order financing allows your business to accept large orders that might otherwise be difficult to fulfill. Because the lender is concerned with the creditworthiness of your customers rather than your own, you can obtain funding even if your company has not yet established a high credit score. In most instances, purchase order financing does not involve guaranteed loans, so if your client doesn’t pay, your business is not responsible. This form of financing offers greater payment flexibility than a traditional loan because it is dependent on how quickly your customers pay their bills.
For more advice on purchase order financing, get in touch with Affinity Capital Funding.