If your business runs into the great problem of having more sales than inventory or cash on hand to complete the sales, you then face the unenviable prospect of losing customers. Instead of losing potential sales, a financing alternative is ready to help your business.
Understanding What Purchase Order Financing Is All About
This method of financing is one where business owners receive cash advances on their outstanding purchase orders. When business owners use this type of financing, lenders potentially pay a business’s suppliers up to 100% of the cost required to manufacture and then deliver goods to customers.
Once the customer receives the goods, the business invoices them for their order. After this point, customers pay the financing company directly, with the lender deducting their fees and paying the rest to the business.
Businesses like this type of financing because of the flexibility it offers. Companies utilizing this type of financing have the flexibility to fulfill orders on their own if they have the assets available, but if they do not, they can call upon the financial partner to fulfill the order.
Some of the Pluses and Minuses of Purchase Order Financing
The most tangible benefit of using this type of financing is that it allows a business to fill orders they otherwise could not because of insufficient assets. This financing is generally relatively easy for companies to access compared to more traditional financing. This financing also allows businesses not to have to worry about budgeting for payments on a loan.
The primary drawback of this type of financing is the cost. Businesses that look at this cost as a percentage of the total invoice may think the price is reasonable, yet when this cost gets extrapolated as an annual percentage rate, it becomes evident that this is a costly financing option.
One of the other drawbacks is that businesses will rely on customers to pay their invoices in a timely fashion. When customers do not pay, the burden to pay the balance to the lender falls upon the business. This scenario can also make it difficult for a business to accurately forecast its future financial situation since a substantial portion is now out of its hands.
There may be nothing worse for a company than being unable to fulfill orders to both new and existing customers in a timely fashion. If your business faces this dilemma, purchase order financing is often a tremendous short-term alternative.