PO financing (short for “purchase order financing”) is a way for small businesses to get access to the working capital they need to start taking on larger customer orders that would otherwise have to be turned away to bigger competitors.
The Basics of PO Financing
When a business has an unusually large customer order, PO financing provides the funding needed to fill the order and deliver it to the customer. When the order is completed, the PO financing company takes over, usually handling the delivery of the goods. The financing company then presents the full invoice to the customer for payment. When the customer pays in full, the purchase order financing company then subtracts the amount of money that was advanced to the business, as well as any other fees, and the rest is given back to the business in the form of revenue. This allows smaller businesses to play in larger arenas and take on bigger orders at a higher volume without placing a strain on their cash flow.
Financing Without Debt
PO financing is considered a sale on receivables, and therefore does not show up as debt on the balance sheet. Prior to PO financing, businesses were relegated to taking out bank loans, which meant taking on debt. The downside of using bank loans for growth is that the majority of the revenue generated from larger sales goes back to paying off the bank loan, which almost negates the rewards of growth. Conversely, purchase order financing allows businesses to enjoy the revenue generated from large sales without taking on debt – because the customer ends up paying for everything.
Purchase Order Financing Preserves Credit
Conventional bank loans require businesses to have healthy credit ratings in order to get considered for approval. PO financing is not a loan, and the customer is responsible for paying off the financing, so your business credit rating is not called into question at any time. Purchase order financing companies may, however, run a credit check on your customers, to see if they are reliable in paying their invoices, or if they pose a risk. With customers who have less than stellar credit, the financing company may require a deposit from them before the order is delivered, and possibly another payment when the order is at the halfway point. This ensures that the customer is more likely to pay the full amount once the order is delivered.
If your business is poised for growth, or simply wants to compete by taking on larger customer orders, PO financing can provide the funding you need.
Contact us today to request PO (Purchase Order) Financing!