If your business is in the growing stages, it should come as no surprise that it might be limited in the amount of funds that it has. Most growing businesses are relying on loans and outside capital investments to stay afloat. The order sizes of a new business can be limited because payment isn’t received until after an order is received. However, with purchase order financing, a business can circumvent this issue.
Suppliers Get Paid Upfront
With PO financing, your suppliers get paid upfront without your business having to pay a cent. What happens is that a letter of credit is issued to your suppliers that they can take to the bank. Your suppliers are then paid and you simply wait for your customers to pay the invoice so that you can repay the loan.
Businesses Can Accept Larger Orders
The PO financing method is predicated on the fact that your business has an order that is going to be fulfilled. The order is the collateral upon which the loan is issued. So, your company simply needs to have an order to get the loan. A business is now free to get out there and accept whatever order it wants. Once a company gets that first big order, it generally leads to larger orders and revenues start to flow.
Help Your Credit Score
This type of a loan will not show up as a debt on your books. It will look like the bill is paid if anyone were to ever check the credit of your business. This means you can go to the bank to secure more financing and your PO loan will make it look like your revenues are higher and your business is doing better. By the time you have repaid your PO loan, you might already be on to your next order and next source of capital.
Your Loan Is Tied To Your Revenues
The interest rates on these types of loans are also quite reasonable. You won’t get the loan unless you can show that you are making at least a 15 percent profit. Even after accepting a loan of this variety, you are going to be guaranteed to make money on your order. You never know what kind of interest rate a bank will charge, especially when you are a new business.
If your small business is looking for ways to find capital to pay suppliers and accept larger orders, a PO loan is something to keep in mind. Your business can be at any stage in its development so long as the company has orders coming in and can guarantee that the order will go through. It is the perfect way for a small business to take that next step in its growth.
Steve Ashland is a financial consultant for medium to large corporations. He suggests you check out purchase loan rates before dipping into your capital to cover large orders.