In the life of every startup, there usually comes the point where a major customer is ready to take the business relationship to the next level with a significantly larger order. But what if it happens sooner than anticipated and you haven’t yet built up the working capital or cash flow to supply or manufacture the products?
Instead of turning down the order, risking the loss of the customer and hurting future business dealings, many companies turn to purchase order financing to help bridge the gap and in turn, build their business.
The Basics of PO Financing
Purchase order financing is a short-term solution to help you buy the goods you need to fill a confirmed order from a reputable customer. After verification that the PO is legitimate, the lender will supply the cash or a letter of credit, which will pay for the supplies needed to create the finished product. When the order is satisfied, the lender will then receive the monies from your customer, subtract any interest and fees and remit the net amount to you.
PO financing is generally a flexible form of lending, available as-needed whenever you receive an unusually large order or opportunity and adjustable to meet fluctuating demand. Here are a few scenarios that might benefit from a purchase order loan:
Imagine that your business is wholesale, your best customer is expanding to a national level and you exclusively supply one of the store’s signature product lines. If ordering the supply upfront would put too much of a dent in your cash flow, a purchase order loan could be a logical alternative to traditional bank financing solutions.
2. Real Estate
Say you are starting in real estate, and you come across a property for sale that might not be right for you, but you know of an established investor that would find the deal irresistible. Instead of acting as a broker for a commission or forming a partnership, you might benefit from PO funding by purchasing the property outright, selling it to the investor, making a potentially substantial profit.
Perhaps you are a newer manufacturer, and you have just received your first order from a big box retailer intending to distribute your product across the region. A PO loan could be ideal for helping you purchase the raw materials you need to fill the retailer’s order, which may increase your brand recognition and lead to broader distribution.
Don’t despair if you find yourself in a situation where a considerable order is pending and you don’t have the capital to handle it. Alternative lenders are available with purchase order financing solutions that could help you fill the order and help your business grow.