In business, you are always looking to receive that big order that will bump up your company’s growth to the next level. Sometimes, especially with small businesses, you can receive an order so large that you don’t have enough working capital to secure the goods necessary to fill the order. You don’t want to risk losing the order and a potential return customer, so where do you find the cash necessary to make this happen? This is where purchase order financing comes in. This type of financing isn’t new, but interest in purchase order financing has increased in recent years due to the fact that traditional bank financing has become more difficult to obtain. Purchase order financing is obtained through a specialty finance or merchants solution company. Businesses qualifying for and utilizing this type of financing are usually product manufacturers or wholesalers supplying goods to large national retailers or government agencies.
How Purchase Order Financing Works
Purchase order financing is fee-based, short term financing. Because it is fee-based there is no interest charged. How it works is actually pretty straightforward. A business receives an order larger than its current inventory and does not have enough cash to purchase the additional inventory necessary to fill the order. The business will apply for purchase order financing to cover the lack of working capital. The specialty finance company will check the credit history of the customer who placed the order, not the business applying for the financing. If the customer has a solid history of paying its bills promptly and proves to have the cash flow to pay for the order, financing will be approved.
Once the purchase order financing has been approved, the specialty finance company will send a letter to the supplier of the goods required to fill the order. This letter guarantees payment for those goods. The supplier will let the finance company know when the order is complete and ready to be shipped. The finance company pays the supplier for the goods which are typically shipped straight to the customer. The business that applied for the financing is typically bypassed in the shipping process. Similarly, the customer pays the finance company, not the business. The finance company
takes their fee and then pays the remaining profits to the business. Most specialty finance companies will not approve purchase order financing unless there is a large enough profit margin for both the business and the finance company to make a decent profit.
Benefits of Purchase Order Financing
At first as a business owner, you may balk at the idea of giving part of your profit to a specialty financing company, but isn’t it better than losing the order and making nothing at all. With purchase order financing your business will be able to:
-Accept new business, even without sufficient working capital
-Take on an exceptionally large order that you would normally be unable to accept
-Avoid applying for an expensive traditional bank loan
-Make a profit and grow your business even when money is tight
-Build a reputation with your customers as a company that can deliver what they need
-Create customer retention and repeat business
Also with purchase order financing, your business isn’t required to have perfect credit. The specialty finance company will be more concerned with your customer’s credit history than yours because it is your customer who will be paying them. This makes purchase order financing a great funding option for businesses with average credit.
CFG Merchant Solutions is a privately owned and operated specialty finance, and alternative funding platform in New Jersey. CFGMS services small to medium-sized businesses that intend to use working capital proceeds in order to grow their business. Whether a business is looking to purchase inventory or equipment, bridge seasonality, support expansion, or invest in marketing and advertising, CFGMS can cater to a working capital solution that meets those needs. CFGMS knows how to quickly, effectively facilitate a transaction, from application through funding, in order to meet our customer’s unique working capital needs. Consult with us today to see which of the funding options we offer is right for your business.