Businesses today are scrambling for loans and other types of financing, and that’s because banks are now very tight-fisted. But if you are an apparel company that’s been awarded a huge merchandise order, then you have another source of ready working capital. You may be able to get the funding from institutions that provide a purchase order loan for apparel companies.
The way a purchase order loan works is different from a regular loan. Generally, the purchase order is considered a form of asset. Here are some aspects that need to apply to your situation if you want to use a purchase order to get the loan you need.
- Does the customer have the ability (and the willingness) to actually pay for the order? This is perhaps the most crucial question, and it shows how a purchase order loan is different from traditional loans. In traditional loans, the key question is whether you have the ability to pay back the loan. In a purchase order loan, the most important consideration is whether your customer can and will actually fork out the money. That’s why the best purchase orders are those made by a government agency and publicly traded corporations. The more reputable the customer is, the better it is for you. Different types of lending institutions will have different standards as to whether the customer is likely to pay.
- Does your apparel company have the skill to do the work and complete the order? Not even a government agency will pay if you can’t deliver the goods according to the terms of the purchase order. You have to comply with the quality and quantity requirements, and there may also be a schedule involved. The best way to do this is to show that you already have the experience in fulfilling similar orders in a timely manner.
- Is the payment schedule for the order quick enough? In the apparel business, normally the payment comes within 90 days (sometimes even within 30 days) after you’ve delivered the goods. But there are a few cases where the payment can be staggered for a longer amount of time. Some customers may even ask for a year to pay or even three years, as if they are paying for a car.
- Are your profit margins sufficient? This is essentially the percentage of the selling price which goes to you as profit. For example, if you sell dresses for $100 each and you can make them for $75 each, then you have a 25% margin. Anything less than that may not sit well with the lender, although 20% margins may suffice if the customer is an extremely repeatable company and the payment schedule is short.
- Are you asking for the right amount of money? Don’t expect a $100K order to result in a $100K loan. For a government contract, 85% of the order may be possible, and for private companies you may be able to get half of the order as a loan.
- Are you dealing with the customer directly? Lenders really hate it when there’s a middleman involved.
A purchase order loan for apparel companies can be a huge boost that can fuel the growth of your business. It can even help make sure that you have the resources so that you can actually manufacture and deliver the goods. When you land a major purchase order or contract, check if you can use it to obtain the working capital you need for your business to thrive and grow.