This is a type of funding that businesses can get when they have very little cash flow for the purpose of purchasing stock in order to be able to fulfill their customer’s orders. By going to a purchase order financing company, they will pay for the manufacture and delivery of products directly to a business’ customers. Upon receiving their goods, the customers will make payment directly to the purchase order financing company rather than to the business that they initially placed their order with. They deduct their fees and then send the remainder to the business.
This is a good option for those businesses that are relatively new and do not have enough cash at hand in order to be able to pay for any orders that have already been placed by customers. Doing this ensures that the business does not have to turn any of its customers away due to thek not being able to fulfill their order.
Although at first thought you may think that getting this type of finance may be a complicated process, it is actually a fairly straightforward one and can be broken down into a number of individual steps.
- Application – most lenders will approve businesses for as much as 100 percent of their costs to their suppliers, although this is dependent on reputation and credit rating.
- Payment – the purchase order financing company makes payment to your supplier for the goods, thus allowing them to begin the manufacturing process.
- Delivery – once done, the supplier sends the goods out directly to business’ customers so that they get what they ordered.
- Invoice – after delivery, the business sends an invoice to their customers, asking for payment within a certain period of time.
- Payment – payment is made by the customers directly to the purchase order financing company, rather than to the business the order was placed with.
- Forward – the money from the customer’s payment is sent to the business, minus the fees that the purchase order financing company takes for their services.
Pros And Cons
Just like most financial products out there that exist within the marketplace, there are both good sides and bad sides to using purchase order financing.
- Pros – whenever businesses are struggling to fulfil customer orders due to lack of available finance, then purchase order financing can prove a useful tool. Not only are these financial products easy to get, they do not require personal guarantees, and a more flexible option than some other financial products.
Cons – whilst purchase order financing is beneficial to some businesses, it does not suit all of them. Before going down this route it is important that all other avenues are considered. This is because the fees with these tend to be higher than with other financing options, there is no guarantee that a business will be approved, the option is not available for those businesses that provide a service, is only a means of short term funding, and it means that a business’ customers have to interact with the lender.