Many financial experts advise that international PO funding should only be a last resort for small businesses, even though it offers several advantages such as a quicker approval process. That’s primarily because the cost of the financing is almost always higher than the cost of a traditional business loan from a bank.
The higher cost of purchase order financing is not because lenders are taking advantage of a company’s desperate need for immediate funds. It’s simply because the entire process involves a lot of risks for the lender, such as:
- The purchase order may be bogus. Several schools, for example, have already been targeted by scammers making fake purchase orders. One man was arrested in Louisiana for making fake purchase orders using the name of a local parish school in 2013. In December of the same year, Texas A&M also issued out an alert that invalid purchase orders misrepresenting the university have been used.
- There may be a problem regarding the transfer of the receivable to the lender. It could be that there are laws prohibiting the transfer or there may be a third party making a claim on it.
- There may be a dispute concerning the goods or services. For example, the buyer may claim that the goods or services provided by the supplier did not meet the requirements specified in the purchase order. There are many ways in which these disputes can originate, and such disputes can be complicated and time-consuming to resolve.
- The buyer may also decide to get a discount. There are several reasons why a buyer won’t pay the full amount of the invoice, aside from dissatisfaction with the quality of the goods and services. The buyer may pay less because in the past the supplier was not able to meet the requirements of the buyer. It may avail of a discount by returning goods it was not able to sell. It may even hold back part of the fee as a way to induce continuation of the business relationship in the future.
- There’s also the possibility that the buyer will pay the supplier directly instead of paying the lender.
- And then of course, there’s also the risk that the buyer may be late or worse, default on their payments. The buyer may be unable to pay because it is experiencing financial troubles of its own.
Remember, this is international PO funding, and that makes the entire process much more complicated and riskier. With the parties involved located in different countries, the verification process becomes even more difficult. What’s more, different countries have different laws and rules. Keeping track of all these regulations means more work, hence the higher fees.
But the fact that the lender is still offering your business the working capital it needs is always better than nothing. Even with the high financing costs, it’s still better than not having the money you need to operate your business. Lacking capital will cost you more in the long run, and it may even spell the end for your business altogether.