If you run a construction company, it’s not easy to explain just how much you need to spend in order to make a profit. You need to pay your workers, you have to buy lots of supplies and machines, and you have to have enough money to pay for the rent of special equipment. All of these expenses can add up to an unbelievably large amount of money. But if the offered contract is large enough, then you may be able to get some purchase order financing for construction companies.
How Purchase Order Financing Works
With purchase order financing, the finance company will first confirm the authenticity of the purchase order. Then of course they will also investigate the reputation of the client company making the purchase order.
After that, you need to identify your expenses. You need to list down all your expenses which have to be dealt with in order for you to fulfill the contract. You also need to demonstrate that you can make a healthy profit out of the deal. Most finance providers won’t bother if you don’t make a good profit out of the contract in the first place.
If you can meet all the requirements, then you may be able to qualify for purchase order financing. You may get as much as half (or even three-fourths) of the value of the purchase order right away. Your finance company can then pay off your suppliers for you.
Once you get your money, you can then pay for payroll, equipment rental, and supplies. You can fulfill the contract and then get your profit. Often, the client won’t pay right away but will wait for 30 to 90 days as well.
Advantages of Purchase Order Financing
So why choose this route instead of a traditional bank loan? Here are some compelling reasons:
- Applying for a bank loan takes a very long time to complete, and the chances of getting the money you need is fifty-fifty at best. With purchase order financing, the chances of getting the funding are much better.
- Purchase order financing is a bit like working with partners, except that in this case you don’t need to sell of a slice of your company just to get the working capital you need.
- By being able to accept a purchase order that may have seemed impossible at first, you build your reputation with your client and that makes you much more successful in the future. You can get a lot more contracts because of your success in fulfilling just this one contract.
Without the necessary cash reserves, you may not be able to fulfill a business contract. But with purchase order financing for construction, you may be able to get the money you need to meet the terms of the contract and ensure that you maintain a good reputation with your client. By fulfilling the contract, you’re more likely to get more projects from that company in the future.