When small businesses hit their stride, they get into a comfortable routine. Customers make requests, sales are made, and then revenue is generated upon completion of the order. However, an order will occasionally come along that is unusually large, which leaves business owners in a bit of a quandary. Taking on a large order can place a detrimental strain on cash flow. Turning down the order will only drive a potentially lucrative sale to a competitor. And taking on debt with a bank loan to cover the cost of filling the order is counter-productive. In order to solve this problem, small business owners can use purchase order financing.
How purchase order financing works
Purchase order financing is an advance of funds needed to fill an order. This type of financing is not available from traditional lending sources, and can be secured through a commercial financing company. Once the order is filled and delivered, the commercial finance company will bill the customer. When the customer pays the invoice in full, the finance company will subtract the initial advance plus a small fee, and deliver the remainder to the small business in the form of revenue.
Competing with large companies
With purchase order financing, new and small businesses never have to worry about turning down large orders, or referring customers to their larger competitors. A more level playing field allows small business owners to gear some of their offerings to customers with large scale needs – and being able to accommodate customers with orders of every size gives entrepreneurs and edge over other businesses in their respective markets.
Growth capital
One big advantage to small businesses using purchase order financing is that they can use the larger amounts of revenue from big orders to grow and expand in a short period of time. The revenue from purchase order financing can be used for new and better equipment, hiring additional staff, running marketing campaigns to broaden a company’s reach in a particular market, or anything else the business needs.
No debt. No credit checks.
Purchase order financing is not a loan, and as such is not marked as debt on the balance sheet. Rather, it is considered an advance or a sale on future receivables. This eliminates the need for credit checks on the business because – when all is said and done – the customer is paying for everything. Occasionally credit checks are run on end customers, to ensure they have an established history of paying their bills responsibly, but other than that, this type of financing is much faster and easier to arrange than waiting for a bank loan application to process.
If you own a growth-focused business and would like to take advantage of the ability to get revenue from larger orders, purchase order financing is the right financing solution for you.