It’s often a wrenching decision to turn down a large purchase order from a reliable customer simply because you don’t have the financial resources to fulfill the request. This is especially true when that order represents a very tidy profit, or if it may result in regular business with that customer. That’s a lot of potential profit down the drain.
To solve this problem, some businesses apply to banks for a loan. Others sell a percentage of the business to venture capitalists to get their hands on much needed cash. But for others, the necessary funding may be available via alternative forms of financing such as purchase order finance.
This approach offers several crucial advantages:
- You don’t miss a great opportunity for profit. Purchase orders represent a large chunk of profit, but if you can’t take advantage of them then your company misses an opportunity to increase revenue. It’s not only this particular situation which can provide the profit for you. It also affects your future business, because your reputation can be affected as well. If you can deliver on the purchase order, then the customer is more likely to do more business with you in the future. But if you turn down the order, then the customer will have no choice but to do business with your competitor.
- Purchase order financing takes a very short time to secure. A business loan from a bank can take a very long time to process, because of all the requirements they need. And often, the application for a loan may be rejected. But with purchase order finance, it doesn’t take all that long because the financing company only needs to know the creditworthiness of your customer.
Once you’ve already had a good relationship with a purchase order finance company, getting much-needed funding may take only a few days.
- Your bad credit isn’t going to be a problem. Many businesses can’t get a bank loan because their credit isn’t up to par. So if your credit is bad, even if you do get a loan it may not be for the amount you really need. The interest rate may also be exorbitant.
- You don’t need collateral. Many businesses put up some of their assets as collateral to get a loan, and sometimes business owners may even need to offer their personal assets on the line. Now with purchase order finance, the lack of collateral is not going to matter, because the purchase order itself is the only collateral you really need.
- It frees up your cash flow reserves. If your current cash flow is inadequate to pay your suppliers to fulfill a purchase order, the financing company can come in and help. Not only can they add the missing amount, but they can actually cover the entire supplier expenses. This frees up your cash flow to use for more pressing needs, such as salaries for your workers and paying off other operational expenses.
- It doesn’t affect your credit. Even if your bank loan application is approved, your credit is affected. But purchase order finance is technically not a loan at all, so your credit is unaffected.
With purchase order finance, you can take advantage of opportunities brought on by a large purchase order.