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Purchase Order Financing Positives and Negatives

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(Credit: Purchase Order Financing Positives and Negatives) Purchase Order Financing Positives and Negatives
December 29
3:07 PM 2020

As a business owner, you might know about purchase order financing. It's a way your company might be able to continue with no work stoppage if you run into tough times. That's something that's happening with many different businesses and niches right now, so this solution is something of which you should undoubtedly be aware.

We'll take a moment today to talk about purchase order financing. We'll explain what it is, why it's a good idea, and also some potential pitfalls you want to avoid if you decide to implement this strategy.

What Exactly is Purchase Order Financing?

If you want to know about purchase order financing, there are a couple of critical components you should understand. You might qualify to get it if:

  • You have a working capital shortage

  • You're trying to fill a verifiable incoming order

If you own a company, and you're running short on working capital during a pay cycle, you might have to shut down if you can't get money from somewhere as a stopgap measure. You might need cash to get the raw materials you use for product creation, for instance. You don't have enough money for the week, month, or quarter.

Some companies will lend you that money. You can use it to get the materials you need or pay your workers, arrange product shipping, etc.

The only time where you probably won't be able to use this methodology is if you can't give the lending company a straight answer as to what you're going to do with that money. You must provide them with a tangible reason why you need it. Otherwise, they will probably not be willing to lend it to you.

Why is Purchase Order Financing a Good Idea?

There are some particular situations where purchase order financing makes a lot of sense. For instance:

  • You may want to expand into new territory

  • You may be having a temporary supply issue

Perhaps your business has some brick-and-mortar locations, and you're going to open up a new one. You need the capital to up your product output, and you decide to pursue purchase order financing for that. The average financing company that offers this service would probably be okay with lending you the money for that reason.

Maybe you usually use a particular distributor for raw product materials. That distributor doesn't have what you need for a single billing cycle.

You can go through somebody else, but they cost a little more, and you don't have the cash. In that case, you can consider purchase order financing to get what you need.

Purchase order financing makes sense because it's a way for you to secure your money and get your products out there on time, every time. You won't miss a shipment, or if you have an eCommerce business model, you won't have a website product shortage. Your customers will see you as dependable this way.

What About Potential Drawbacks?

The one potential purchase order financing drawback is that, as with any financing, the company that does this for you isn't doing it for free. They will charge you interest when you borrow money from them, which you should understand perfectly since that's how theirs is a profitable business model.

It's kind of like when you use a credit card to buy something. If you do that, you have what you wanted, but the longer you don't pay back the money, the more interest you will have to hand over to the credit card company.

Usually, the financing company will give you a grace period, during which you can pay back that money without paying a penalty. They are counting on enough businesses not being able to do that, just like with credit card companies.

If you need short-term capital, you'll have to look at your situation and determine whether this is the best solution. Many times, it's a perfectly viable way to get the cash you need.

Other times, you might feel like this isn't the best move. If you don't want to borrow money from a purchase order financing company, you could always wait to expand your business or whatever else it is you're trying to do.

It's all about how urgently you need funds. If you're not going to be able to cover fundamental payroll costs, contacting one of these lending companies makes sense. Just make sure you locate one that will give you acceptable interest rates and read all the fine print.

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