Small businesses often have the resources to handle early operations and order fulfillment, but there can come a time with the cash flow isn’t strong enough to support greater demand and business growth. One of the primary challenges with filling orders is the slow payment process on outstanding invoices. Whether your contracts allow for a 30 to 90 payment deadline, your company doesn’t always have that much time available to wait for the money. To meet the demands of moving your company to the next level, consider using purchase order financing for cash flow help.
The Problems of Growth
As business starts to get better and more orders start to flow in, you may be in serious need of extra raw materials and supplies. You may also need to bring on a few more employees to handle the workload. Unfortunately, these efforts require cash on hand, which your company may not have as it waits on customers to settle accounts. It is difficult to go to the bank for a loan when there is little collateral on hand and no lengthy credit or financial history for the company. NOt being able to hire people or purchase supplies can create serious problems.
The Benefits of Purchase Order Financing
For companies who extend 30 day or longer payment options to their customers, a cash flow gap can occur that destroys business opportunities. Without having materials on hand or employees to fill orders, you may have to turn down the order and lose a customer to your competitor. This can stall your business growth.
Purchase order funding extends the money you need to a supplier that can provide the goods you need to fill an order. Rather than having to take out a loan and borrowing money, a third-party lender extends a letter of credit to the supplier for the amount of the order your company intends to make. The supplier releases that materials needed, and your company is able to accept the big order and fulfill it. Your company earns a profit, makes another customer happy, and moves one step closer to growth.
The Candidates for Purchase Order Funding
Not every business will be a good candidate for this type of funding. Most frequently, businesses that deal in manufactured goods, have a profit margin over greater than 20%, and customers that are creditworthy and established with the company are the best candidates. If this sounds like your company, purchase order financing may be a strategy for you.