Small business owners know that having issues with cash flow, while trying to fulfill existing customer orders, is never an easy endeavor. The customer is impressed and wants product, but the small business lacks the funds to not only purchase the raw materials, but to pay for the work needed to complete the customer’s order. Because of their uneven cash flow the small business is left with a large customer order they can’t even start! Is there a solution to such a problem? In fact, there is. It comes in the form of purchase order financing. So, what is purchase order financing, how does it help small businesses with financing.
Purchase order financing occurs when a financing company extends working capital to small businesses, allowing them to purchase the raw materials and parts needed to fulfill a given customer order. Once the order is completed and shipped, the financing company is then reimbursed and the small business is then charged a fee for the financing company’s services. Purchase order financing is a variation of receivables factoring. However, instead of the financing company allowing the company to draw upon the receivables value, the financing company provides up-front cash to the small business based on the value of their customer’s purchase order. This allows the small business to fulfill the customer’s order while freeing up cash reserves.
In a number of cases, purchase order financing is the single best financing option when compared to other conventional lending methods. Given the current state of the economy and tightening of global credit markets, a number of small businesses have had their credit lines slashed. In many cases, these businesses have excellent bottom lines and are in good financial standing. Purchase order financing not only allows small businesses to finance their existing purchase order, it also provides them with immediate cash. This allows the small business to benefit from prompt payment initiatives and discounts with their own vendors and creditors by paying them faster for those aforementioned parts and materials. This is a much better situation for the small business. Otherwise, it would be late in paying its vendors and creditors because of having to finance their own customer’s receivables for 30 days and beyond. This would negatively affect their credit rating.