The lack of sufficient working capital can greatly affect any small business. If a contingency occurs, then the lack of working capital can prevent a business from fulfilling their usual services. And even if working capital is sufficient for the current level of business then new opportunities for growth may not come to pass because the working capital is not enough to fulfill bigger orders.
What is Purchase Order Finance?
With purchase order finance, these disasters can be prevented. Essentially, this is a type of loan which is contingent upon the purchase order. The lender checks that the purchase order is authentic and the customer is qualified for the transaction. Then the lender assesses the suppliers to see if they can deliver the supplies to your company. Of course, the lender also evaluates your own company’s ability to fulfill the terms of the purchase order.
Then the lender issues a letter of credit to your suppliers. Your suppliers then get paid when they’ve delivered the goods according to the terms of the agreement.
The lender gets paid when your customer gets the goods. Since usually you issue an invoice, you may have to get the assistance of a factor that advances about 80% of the value of the invoice to you. The purchase order lender then gets paid for the advance when you get paid.
Choosing the Right Purchase Order Financing
Basically, what you need is a purchase order lender who can work with you, your customer, and your suppliers. But this can get very tricky sometimes. For example, you may have suppliers which are based in a foreign country. If your lender has no experience with these suppliers, then issuing a letter of credit can be problematic.
You also need to be able to comply with the specific requirements of the purchase order lenders. Some lenders require you to prove that you have at least 30% profit margin. But others only require a 20% profit margin.
You’ll also need to check their funding levels. Some can offer millions of dollars for purchase order finance. Others may have minimum finding levels which may be much more than what you need.
The lender’s fees and interest rates must also be noted. Some lenders are more reasonable than others, while others charge high fees because of the inherent risks to purchase order finance. Your customer may cancel an order, or your supplier may be unable to deliver an order within the terms of the purchase order.
Finally, choose a lender who can give you what you need fast. There is a window of opportunity here which limits the time you have. Your lender must be able to quickly evaluate the situation to see if they will provide for the financing or not. Taking too much time may lead the customer to cancel the order and go with another company.
All these considerations must be reviewed carefully before picking a purchase order finance company to work with.