Business ventures are bound to face difficulties when it comes to cash flows. The problem is majorly experienced by small business owners where cash flow is anything but not smooth. Also, when you get orders more than expected, there are chances you may not have the cash to purchase material and deliver products. There are times when orders do not come consistently either they are coming all at once or not at all. The balance is a tricky thing to maintain in the initial and overloaded peak of businesses. Naturally, if you have many orders to fill, you will require huge funding to pay your suppliers.
If you turn, down the orders or limit your growth due to the cash crisis that can be suicidal for your business, so what are the options you can explore to fulfill your requirements? Where can you collect the needed initial assistance for funding? Whom can you lean on in those times?
Purchase order financing is the funding tool for businesses that are facing financial crises or cannot afford the supplies. The company is unable to fulfill the customer orders on its own financial grounds and needs the support of funding options to deliver the required outputs.
In the Purchase Order Financing system, the PO lender pays the supplier directly to start the manufacture of goods and successful delivery to the customers. The PO lender, after deducting the money provided to manufacturer and service fees pays the remaining amount to the company. It is the type of financing you receive before the products are delivered, and an invoice is generated. If you need financing after goods are delivered an invoice is created, you need to opt for Invoice Factoring. In purchase order financing, it is mandatory for the business owner to sell tangible goods.
Purchase Order Financing Process
There are four people involved in the process of purchase order financing: the business owner, the PO lender, supplier, and customer. The purchase order financing company is approached once the company receives a surplus order and needs resources to fulfill the order. The company estimates the cost for the amount and type of goods needed to deliver with the supplier. The supplier is paid through the order financing company and starts the process of working on the product. Lastly, the supplier delivers the product to the customer and informs you about the same. An invoice is sent to the customer, and payment is made from the receiver end. Once the Purchase Order financing company is paid, you receive your share after service deductions. The funding takes about 1 to 2 weeks to find. The interest rates range from 1.8% to 6% per month.
The Benefits of Purchase Order Financing
It is best for startup owners who find it hard to arrange cash for their orders and are yet dedicated to providing quality services. When you are finding it hard to get qualified for loans or your credit score is low, PO financing is the best option for establishing good business in the market. The Funding system does not ask for any personal guarantee or payment in installments as it is very different from traditional loan system. It is also good to opt for purchase order financing when you have surplus demand for the product and less available resources.
The financing provides you with the funds that you need in advance to accomplish a taken task. The biggest merit of the system is that it restricts your spending. Since the finance is provided to your supplier and used in the completion of the order to the customer, you can deliver on-time service to the customer that maintains your track record. In turn, the financing company makes money by charging you a percentage of amounts paid in advance to the manufacturer.