When large orders from customers come in, small business owners sometimes wonder how they will obtain the financing necessary to fill the orders. They may not have the necessary ready cash. Yet they don’t want to turn down the order and possibly even lose the customer. A possible solution to this difficulty is purchase order financing. Here is what you need to know when considering this funding method.
The Basics of Purchase Order Financing
These loans are commonly obtained by wholesalers, distributors, resellers, seasonal businesses, and other companies that find it necessary to buy supplies to be able to fill orders. When you obtain a purchase order and realize that you need outside financing to fill it. You approach a lender with the purchase order and an estimate by the supplier of its cost. Upon application approval, the financing company directly remits the cost to the supplier. Then the supplier sends the ordered items to your client. After receiving your invoice, your client pays the lender. Which then sends the balance of payment to you after deducting its fees.
Applying for Purchase Order Financing
To qualify for purchase order financing, your company generally has to be of the type that buys products from suppliers and resells them. Orders usually have to be for $50,000 or more, and sales margins should be at or over 20 percent. The lender will assess your client’s creditworthiness, the supplier’s reliability, and your company’s reputation. You will need to provide documentation such as the purchase order, the invoice from the supplier, the invoice you send to your client, and tax records and financial statements from your business.
Advantages of Purchase Order Financing
Purchase order financing helps you grow your business by making it possible for you to accept orders you would otherwise have to turn down. Your company may qualify for this method of funding even if it does not have a good credit score. Unlike a traditional loan, you will not be burdened with ongoing monthly payments. You are relieved of the time-consuming process of collections from your customers. Finally, once you establish a relationship with a lender, financing becomes quicker and easier.
For more advice on purchase order financing, contact Lode Capital.