Most people who own credit cards and pay mortgages are quite familiar with how loans work. You borrow money, and then you pay the lender each month for the principal amount and interest. It’s very straightforward. Sometimes you may have to put up collateral, and this is called a secure loan.
But for many businesses nowadays, traditional loans are no longer reliable as a source of funding. This has made alternative forms of financing such as purchase order finance very popular. Unfortunately, there are still a lot of misconceptions going around about it. So let’s take a closer look at these misconceptions and add some clarity to the discussion:
- Purchase order financing is hard to get and takes too long. Just because traditional bank loans are actually time-consuming and hard to get does not mean non-traditional lenders do things in the same way.
Another reason for this misconception is that lenders are not interested in your company’s stability and your ability to pay the loan. Instead, they’re interested in the customer’s (the one who’s making a purchase using a PO) stability and ability to pay the purchase order. The lender is also interested in the capabilities of your suppliers, and of course your ability to fulfill the order is looked into as well.
Although that seems like a lot of investigative work, the truth of the matter is that it only takes two weeks or so before a lender can grant or deny your request. That’s in stark contrast to how banks work, which can take months.
- Purchase order financing comes with inordinately high interest rates. Admittedly, the cost of this type of financing is more expensive than what traditional bank loans charge. But the fees are always low enough that you will still gain a nice profit when you fulfill the purchase order.
The interest rate may be more similar to credit cards or to the interest rates charged by banks to high risk borrowers. That may be high, but at least you can fulfill the purchase order.
- You need high value collateral. Now this is absolutely not true at all. In fact, it may seem as if the purchase order, after it has been verified, is enough to secure the loan. No other collateral is
necessary. It’s actually the absence of collateral which makes this type of financing so appealing to many companies.
- Only shady or unstable companies make use of purchase order financing. The truth of the matter is that with banks so reluctant to lend money through traditional loans, a lot of perfectly reputable companies are availing this type of financing.
So before you dismiss purchase order financing as an option, do your homework first. It may help you get the money you need to help keep your company afloat.