How Can Purchase Order Financing Improve Cash Flow for Businesses?
As a business owner, I’m sure you know what it’s like to keep up with customer’s needs for orders of your products. What if your company is new and not ready to begin landing major orders that need to be fulfilled, or your business is growing rapidly, and new customers begin to place orders on top of existing customers? Better yet, what if you aren’t anticipating the demand of existing customers increasing, which increases demand for supply? Using a valuable financing tool such as Purchase Order Financing, business owners can keep up with their customer’s demands at their own pace while maintaining capital for other areas of their business.
To start, what is Purchase Order Financing and how can businesses benefit from this tool?
Purchase Order Financing is an option for business owners who need more supplies to fulfill products for their purchase orders. Therefore, a financing company will directly pay a supplier for goods manufactured to resell or distribute to customers. This allows businesses to finance the cost of supplies needed to complete a purchase order, consequently freeing up capital.
Although, there are a lot of other costs associated with fulfilling a purchase order such as workers, delivery, soft costs, etc. It should be noted that the funds provided as part of Purchase Order Financing can only be used for the purchase of goods required to produce the final product. However, be aware that there are certain qualifications for Purchase Order Financing.
Let’s look at some of the benefits of purchase order financing:
Benefits of Purchase Order Financing
Purchase order financing can help improve cash flow or increase revenue for businesses in the following ways:
Frees Up the Amount of Cash Available
Purchase Order Financing provides a business owner the ability to expand his or her business in other areas, as purchase orders for products are being fulfilled effectively. Companies opting for purchase Order Financing can thus use their cash on other aspects such as advertising, paying salaries and rent.
Purchase Order Financing can help you build a stable relationship with your customers and suppliers. Since Purchase Order Financing helps you meet your orders, it can potentially increase your revenue in sales. Being able to fulfill orders also helps improve your reputation in the market and the likelihood of new and repeat customers increases.
Helps Startup Businesses
As customer orders are growing, a business owner needs to fulfill each demand. If your business is new, it may be difficult to qualify for loans. So, if you happen to have a reputable and trusted customer to buy your products, this makes qualifying for Purchase Order Financing much easier due to Purchase Order Financing being more reliant on reputable customers than the reputation of your new business. For example, if you have a well-known retailer such as Target or Bed Bath and Beyond as a customer, this increases your chances to qualify for Purchase Order Financing. This would be highly beneficial for a new business to expand without needing a loan.
Let’s look at some of the qualifications of purchase order financing:
Standard Qualifications of Purchase Order Financing
- A minimum of 6 months in business
- A purchase order from a reputable company; a purchase order from a well-known and trusted retailer will likely get approved faster and easier
- A valid tax ID or EIN #
- An active business checking account
- At least 30% profit margin for the business in its total order and must be able to deliver the order to its customer within 60 business days of the purchase order being issued
- Goods must be inspected prior to delivery by the purchase order financing company
Who Should Consider Purchase Order Financing?
If your business has a B2B (business to business) or B2G (business to government) model, and you sell finished goods to your customers, then you should consider Purchase Order Financing to fund your orders. Startups can also qualify, but if they don’t have a good credit history, it may be difficult to apply. Your relationships with your suppliers and customers are an important factor for Purchase Order Financing.
In summary, you may not know when you’ll encounter a situation of a spike in orders from customers, whether it’s landing a major order, new customers, or an increase in demand of existing customers. By using a financing tool such as Purchase Order Financing, there are plenty of solutions. If your business is in need of capital to fulfill orders, then allow a representative from a commercial bank or a private lender who offers Purchase Order Financing to guide and assist you.
About Troy Business Group | Kris Henry
Kris Henry is a representative from Troy Business Group. Troy Business Group is a full-service business financing firm catering to small to mid-sized business all over the world. A representative could help guide and assist you if needed. If you have any detailed questions, please feel free to visit www.troygrp.com for additional information.