Banks take a long time to decide whether or not to approve a loan application. Like all lenders, the primary concern of banks is to make absolutely sure that they will get their money back after a set period of time, plus interest.
And that’s why banks take a very long time to evaluate all your financial documents. They want to know that your company will still be up and running for the duration of the loan.
They will also want some form of collateral so that if you’re unable to pay back the loan they can at least get some thing from you to avoid losses. And of course, they will also need to see that you have an excellent credit history, as this indicates that you have a track record of actually paying back your loans.
But in purchase order finance, the state of your finances isn’t all that relevant. Neither is your credit history. The purchase order serves as collateral in a sense. What lenders consider important are the answers to these 3 questions:
- How capable are your suppliers? In purchase order financing, the lender opens a line of credit to pay your suppliers. But you can’t fulfill the purchase order if your suppliers are not able to fulfill the needs of your customer. The suppliers must be able to deliver the goods in the required quality and volume on the timescales agreed upon.
What that means is that you can’t just pick a supplier that offers the cheapest product. You need suppliers who can meet all your requirements.
- How good are you at executing the purchase order? While your credit history may not be all that important to the lender, your ability as a seller is crucial. The task may just be as simple as getting the products needed and then delivering them as is to the customer.
Or it may be more complicated; you take raw materials and turn them into finished products for your customers. Either way, you need to have a proven track record of fulfilling these orders.
It’s for this reason that many PO finance lenders insist on a completion schedule. You need to make sure that you meet the requirements.
- What’s the credit quality of your customer? One of the first things the lender will do is to verify the purchase order to see if it’s authentic. Purchase order scams are not uncommon nowadays. Then they will check to see if the customer is reputable and has a good credit rating. It’s their ability to pay, not yours, which really concerns the lender in this case.
The answers to these questions may determine the size of the advance you can get, the types of fees you need to pay, and even whether your loan application is approved or not.