You’re on the hook for inventory and materials, but your invoices are still outstanding. And your business has to make payroll next week, and rent is due the week after. Then an order comes in, the biggest one you’ve landed yet—and all of a sudden, you’re wondering if your business can fulfill it. What do you do?
Purchase order financing can be the answer you’re looking for to keep things running smoothly. Through purchase order financing, you can secure the cash to fulfill your commitments and pay for inventory and supplies, all before you ever receive payment from a customer. This article will explain what purchase order financing is and how your business can benefit from it.
What is purchase order financing?
Purchase order financing is a type of short-term financing that can help your business pay for the inventory, materials, or services to fulfill incoming customer orders. Purchase order financing can help your business land sales or new accounts that you might not otherwise have the funding to service. Purchase order financing can benefit new businesses as well as established companies that are rapidly growing or facing a working capital shortage for any number of reasons.
How does purchase order financing work?
There are four parties in purchase order financing: the financing company, the client, the supplier, and the customer. Here is how the parties work together in traditional purchase order financing agreements:
When to use purchase order financing
Wondering whether to use purchase order financing? Common scenarios in which many business owners opt to use this financing option include:
Qualifying for purchase order financing
The purchase order financing approval process is often fast, with approval in days to up to two weeks. It depends on how quickly purchase order details can be provided and confirmed and is contingent upon meeting other requirements of the lender.
In general, you will need to provide the lender information about your business, the customers involved, and your company’s financial history. In addition, approval for purchase order financing may hinge on how much of a credit risk your customers pose, not your business. Lenders will also consider profit margin as well as your business history in deciding to extend purchase order financing. Purchase order financing can be an option for newer businesses and those rebuilding credit, making it an option when traditional bank financing is not available or not enough.
There are key advantages of purchase order financing that any business owner pursuing it should consider. These include:
Regarding the cost, purchase order financing rates can vary depending on suppliers’ costs and payment terms.
Interested in exploring purchase order financing? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.
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