Purchase Order Financing: Allowing Small Businesses to Compete With Big Companies
One of the worst positions for small businesses to get caught in is the one created when a customer has an unusually large order. The revenue from a large order could put a smaller operation ahead by leaps and bounds, but the resources just are not available to fill the request – and if they are, operations and regular customer orders would suffer. In many cases, smaller operations must resign themselves to turning away large orders, which only drives business to their competitors. Fortunately, purchase order financing allows small and new businesses to take on unusually large customer requests and compete with larger companies in their respective industries.
How Purchase Order Financing Works
When a customer approaches your business with an unusually large order, the options are to turn down the request, take out a bank loan to cover the cost of the order, or to arrange for purchase order financing. Turning down the order is never desirable. Getting a bank loan means taking on additional debt, plus the processing time before funds are accessible is not conducive for time-sensitive opportunities.
This is where purchase order financing steps in.
With this type of financing, your business is advanced an amount of capital needed to cover the cost of the order. Purchase order financing is not available through traditional channels, such as banks, and must be arranged with a commercial finance company. Once the order is filled, and an invoice is generated, the finance company takes over to deliver the final bill to the customer. When the customer pays the invoice in full, the finance company subtracts the initial advance, plus any agreed upon fees for service. The remainder is then delivered to your business in the form of revenue.
Leveling the Field
Purchase order financing gives small businesses and edge by allowing them to take on customer orders that would otherwise go to their competitors due to size and scope. No longer are businesses restricted by available resources, and since the customer ultimately foots the bill, the sky’s the limit.
It is Not a Loan
Purchase order financing is not considered a loan, so it does not place any debt on the balance sheets. This preserves business credit ratings, and still keeps options open to seek long-term financing for large internal projects.
Accumulating Growth Capital
By having the newfound ability to take on large customer orders, your small business will be able to accumulate growth capital in a short period of time. This can be used for everything from creating and pushing out new services or products, getting new equipment, expanding to larger facilities, or running marketing campaigns to expand your customer reach.