The Basics and Benefits of Purchase Order Financing
When you are running a business, cash flow is perhaps your most important concern. If you don’t have the money to cover your short-term expenses, you are heading for trouble. Even profitable businesses can struggle with poor cash flow management. Fortunately, for businesses that sell products, purchase order financing can be a helpful way to ensure continuously healthy cash flow.
What PO Financing Is
For many businesses, customers place purchase orders when they want to buy something. The business then fulfills that order from inventory and/or ordering goods from suppliers. This can mean that your business has to incur the expense of fulfilling the purchase order before getting paid for it.
PO financing is a simple way to address this. It is a form of asset-based lending in which the value of your purchase order is being used to secure a short-term loan. This can be used before an invoice is generated and before the payment is made. Therefore, it can have a significant impact on cash flow.
How PO Financing Works
Typically, businesses apply for PO financing before they need to pay for a specific purchase order. The creditworthiness of suppliers and customers plays a big role in the decision process. Therefore, you may be able to get this type of financing even if your business’s credit is imperfect.
When you receive a purchase order from a customer, you can send it to the lender and receive financing for a portion of the order amount. Then, when you either factor the invoice or receive payment from the customer, you pay the borrowed amount plus fees. Essentially, PO financing is a loan to cover your supply costs. Unlike some other forms of financing, it is restricted to this purpose.
Reasons To Use It
This type of financing has some significant benefits. These are the most notable:
- It is easy to qualify for PO financing compared to other loans.
- It is less expensive than credit-based lending in most cases.
- You can receive funds quickly.
- You don’t need to worry about the cost of fulfilling orders. You can just keep bringing them in.
- You will never have to turn down an order.
- It typically covers the full cost of supplies.
Purchase order financing can be a valuable tool for your business. If you want to focus on growing your company, consider signing up for this type of financing. Learn more today.