How Does Purchase Order Financing Work for a Small Business?
The formula for business success is deceptively simple: invest money in your business and sell products to make a profit. Put simply, you need money if you want to make money. This cycle is why continual growth matters. If you want to become a trusted industry professional, you need to invest some of your profits into growing your business. Purchase order financing can help with this goal.
Why Is Purchase Order Financing Important for Small Businesses?
It’s clear that money is essential for a healthy business, so what should you do if you don’t have enough working capital? This issue is something that many small businesses run into at times. Not having enough capital to purchase inventory or pay your employees is a serious problem that can negatively affect your entire business.
Fortunately, options such as purchase order financing are there to support you. You shouldn’t depend on financing to fix serious issues, but it can help you overcome challenges while you discover what’s going on.
What Is Purchase Order Financing?
This type of financing approaches working capital needs from an outside-of-the-box direction. It’s not a loan. Instead, it’s a type of funding advance based on purchase orders.
Once your business qualifies, the basic process follows four main steps: you submit a purchase order, the lender sends payment to your suppliers, your suppliers send the products to your clients, and the lender ensures everything is in order.
In other words, your business doesn’t handle any financing directly. You don’t have to worry about taking on debt or messing around with collateral. You make money, your customers are happy and the lender gets a percentage of the profits, too.
What Are the Benefits of PO Financing?
One of the main reasons PO financing is helpful is that it’s easier to qualify for. Getting a traditional bank loan can take months and often requires extensive financial documents and an excellent credit rating. On the other hand, PO financing barely cares about your credit score; what matters is the financial condition of your clients.
Another advantage is that PO financing gives you more opportunities to grow. In exchange for smaller total profits, you can take on clients that you normally wouldn’t have the inventory volume to handle. In a way, purchase order financing is like teaming up with a lender to offer services that you couldn’t normally afford.
This type of funding isn’t right for every business, but it’s perfect for manufacturers, wholesalers, distributors, resellers and importers.