Financing a small business can be a confusing and stressful event for any new entrepreneur. You have a solid business model and a brilliant plan to grow and sustain your business and make it successful for years to come. For your dream of business ownership to come true, however, you need the proper financing to build it now and help it grow into the future. Perhaps you suffered a setback with your business and it caused the credit score to go down or you are so new that you have no credit history or previous sales history to use as a reason to borrow.
Purchase order funding is one of the ways a small business can get the money they need to turn the dream of success into a reality.
What is purchase order funding?
This type of financing is perfect for those small businesses who may need help with their business but are unable to get loans traditionally. This business has promises of purchases secured from customers, they just need the money to buy the materials and equipment to fulfil those orders. The small business will use these purchase orders as collateral to secure the funding and then pay back the loan once the orders are fulfilled, with interest.
Ways purchase order funding can help your business
- For some businesses, getting a traditional loan from a bank or credit union can be a difficult task. A small business owner may not have enough established credit to secure a loan or the lender thinks it is too risky. Purchase order funding is much easier to secure as it doesn’t require the same credit rating as banks, it only requires existing purchase orders.
- This type of funding allows a small business to take on new orders it might not be able to fulfil otherwise and helps the business grow faster.
- Purchase order funding does not rely on monthly loan payments. A business pays the loan back once the orders are fulfilled and the customer pays the bill. This usually involves a payback term of 30 or 60 days and it is easier for the company to move forward with new business.
- One great benefit of purchase order funding is access to quick cash fast when any new opportunities to do business come up. If your company gets a surprise order for 1000 units, purchase order funding ensures you have the funding ready to prepare that order.
- This type of funding can also cover expenses that ordinarily would take funds away from fulfilling orders. With purchase order funding, the bills can get paid while the money is being made.
With purchase order funding, the list of lenders you have access to gets larger, and there are many purchase order funding companies who want to help you grow your business. This type of financing is usually offered by online lending institutions instead of banks, which only offer it to established long-term customers.
Questions you want to ask when looking for a purchase order funding lender;
- Is the company well-established? You may want to do a little research into the company and see how long they have been involved in this kind of financing and if there are any red flags online such as customer complaints or Better Business Bureau warnings. This can save you a lot of time and headaches as most background information can be found with just a few keystrokes. If there is a recurring problem with this lender, chances are someone has voiced their unhappiness online.
- What is the financing process of this lender? Do they give credit notes to suppliers? Will they require payment directly from customers and if they don’t receive it, then what? You don’t want to put yourself in a position where a customer is being harassed by the lender. Knowing what the lender’s policy is on debt repayment and how they deal with your customers is important in maintaining a positive relationship with your client base and upholding your reputation in your industry.
- What are the fees for borrowing and what kind of collateral does this lender expect? If you need to put up personal possessions like your home as collateral, then you may want to think hard about this lender. You should always keep your personal assets separate from your business to protect yourself and your family in case things go sideways.
Purchase order funding is a simple way of getting the money you need to get your business off the ground. One of the problems small businesses have is finding funding through traditional channels like banks and credit unions. If you are having difficulties getting a loan or investor capital, then you might want to explore all avenues available to you. With the right lender, your business can acquire the materials it needs to fulfil orders and build a solid foundation for the future.