When is Purchase Order Factoring Right For You?

For many growing businesses, financing is a problem that comes up sooner or later. It’s also a very pressing concern when the financing is absolutely required for the company to survive. But many companies are finding out that purchase order factoring may be a viable solution for their problems.

In purchase order factoring, your company gets the funding it needs not through a standard bank loan but through a process that uses a purchase order as collateral.

So is this financing option right for you? Here are some factors you need to consider:

  1. You’re a government contractor, distributor, wholesaler, or reseller of manufactured products. This is a very common requirement, although some finance companies will accommodate businesses that manufacture products themselves, while others may finance service providers.
  2. You don’t have good credit and you are experiencing cash flow difficulties. The cash flow issue is why you need a loan, and the lack of good credit is preventing you from securing a bank loan in the first place. That’s why you need purchase order factoring, because with this option your credit is not important.
  3. You received a large purchase order that you don’t have the resources to fulfill. This can lead you to reject the purchase order, which is not exactly a good thing as far as your reputation and profit margin are concerned. But with purchase order factoring, you can get the necessary resources to take the order and complete it on time.
  4. Your purchase order comes from a creditworthy company, such as a large firm with a stellar reputation for paying promptly. While your credit isn’t very important to the factoring company, the credit of your customer is absolutely crucial. If they have bad credit, the financing may not be approved.
  5. You may have suppliers who demand that you pay upfront. This is what’s causing the cash flow problems in the first place, and this is the problem that the factor addresses right at the start. Your suppliers get paid upfront or receive a guarantee or a letter of credit from the finance company.

Financing companies differ as to how much of the supplier expenses they will cover. Some factors may cover only part of the cost that your current cash flow cannot cover, while other factoring companies may cover the entire supply expenses.

  1. You get a significant gross margin. While again, the standards here are different depending on the financing company you talk to, it’s very typical for them to require that you at least get a gross profit of 20%. If it is too small, then using the purchasing order may be futile because the financing company may take a large chunk of the profit instead.

While there are several options for businesses to secure financing, with purchase order factoring you can get the help you need right at the beginning. This kind of financing is much easier and faster to secure, and it’s a godsend if you have bad credit, little or no collateral, and a large purchase order from a reputable customer.