Some asset based lending companies have a wider definition of what kind of assets can be used as collateral. Most lending companies consider the small business owner’s home as a viable collateral, while others may also accept expensive equipment as security. Some even offer financing based on a company’s purchase orders and accounts receivable, and that’s where purchase order factoring comes in.
Using the Purchase Order
The entire process starts with a purchase order from a customer. Your business may not have enough working capital to fulfill the order which will force you to turn down the opportunity. But you don’t have to do that because some asset based lending companies can help.
What they can do is provide you with extra capital based on the value of the purchase order. You need to demonstrate that the purchase order offers a wide margin of profit, so that the lending company can take its share without hurting your business. You also have to prove that you have the means to fulfill the terms of the purchase order.
Usually, you’ll be provided with a line of credit so that you can pay your suppliers in order to fulfill the purchase order. Your progress towards completing the project will be monitored closely.
Once you have succeeded in fulfilling the order, the next step comes in. Usually, your customer is another business, and you allow it to pay you in full in 30 or even 60 days. Since you’re obviously in need of working capital immediately, that wait may not be good for your business. So again the lender steps in and helps.
They advance you the money based on the value of the payment coming to you. You get an advance that may be worth about 70 to 80 percent of the value of the contract. You can then use that money to cover essential expenses, or even to fulfill other purchase orders so you won’t need the help of the lending company again.
When your client pays in full within the agreed upon time period, you can then get the rest of the money. This is after the lending company gets the money they advanced to you.
The benefit of this entire process is twofold. First, you get the money to fulfill your purchase order. Without it, you don’t get to benefit from the business opportunity. You may also tarnish your reputation because you don’t have the capability to fulfill orders.
The other benefit is that you get your payment in advance. This allows you to take advantage of other business opportunities that will come your way. You don’t have to wait to get your own money anymore, and you can use it to make your operations more efficient.
With purchase order factoring, you get your profits, your lender gets their fees, and your customer gets their order. Everybody wins.