3 Reasons to Consider a Purchase Order Loan
Purchase order financing is known by many names. Purchase order loans. Pre-delivery financing. Production financing. Whatever you call it, the idea behind purchase order financing is the same. It gives a company financial flexibility by providing an advance payment, what some would call a short-term loan, so the company can order supplies or buy materials without worry that they might break the bank or not have available funds to complete the order.
While many refer to this type of financing as a short-term loan, the description is a bit deceiving. They are not loans in the traditional sense. That said, they do provide funds to pay your supplier and help you move forward on larger projects by giving the company the financial leeway it needs to cover pre-project costs. So if it’s not a loan, how does purchase order financing work?
3 Reasons to Consider Purchase Order Financing
To secure a purchase order loan, companies work with lenders, often called factors, that provide advance payments that can be used in a variety of ways. Some may use the cash flow as an assurance of client payment while others will use the funds as working capital to secure supplies to fulfill larger orders. There are three reasons you may want to consider this type of financing.
Work Offensively Rather than Defensively
Most companies choose purchase order financing because it allows them to build adequate inventory for planned or expected orders. This alleviates stress centered on whether the company will have the materials needed to complete orders on time. Nothing erodes trust between a buyer and supplier than promises not kept.
Leave Equity Alone
A purchase order loan is transactional, so it does not require the company to put up any equity to secure the funds, as well. This is a boon for startups who wish to maintain equity and apply it to future growth plans.
Scale the Loan As Needed
Purchase order financing is built to be flexible and scalable, an important benefit for small and mid-sized business. They can be fluid enough to show both contraction and expansion within a fiscal period, giving companies much needed financial advantage. It also keeps the company from unwanted entanglements with other organizations.
Having inventory in stock and ready to go is the hallmark of a successful business. Purchase order financing provides those businesses with the flexibility they need to purchase that inventory before it’s needed. In turn, those companies can plan for future growth without the burden of wondering how they’ll appease the next customer or land the next contract.