Some businesses question the use of purchase order financing because of a stigma against it that is perpetuated mostly by the marketing materials for other forms of credit. Part of the reason it’s easy to get the wrong idea about it and see it as a last resort is because it’s accessible enough that even companies that don’t qualify for other forms of credit can sometimes use it to get an advance, but that doesn’t mean it’s overly expensive or risky, it means it’s accessible. Like all forms of accessible credit, it comes with more perks and benefits at a lower cost when your company is enjoying better financial health, and it also has many options that determine how it will impact your business.
So who benefits from this kind of arrangement? Companies that rely on invoicing to bill customers, especially those using invoicing plus time as a model. Your business also needs to either make or procure actual goods, not services. The costs are variable based on your company’s financial health, the credit and payment history of individual customers in the batch of orders used as the basis for the advance, and the expected time until payment. There might be fees for late payment or nonpayment, too, depending on your financing provider.
Purchase order financing can be used to finance the entire field of outstanding orders at once or to specifically target customers so you can use a few big orders to get the advance you need without paying for the service over your entire set of outstanding orders. It all depends on who you work with, what you need, and exactly what kind of business you operate. While the basic model for factoring is pretty much the same across industries, the exact structure of the advance and fee options can vary depending on the size of your business and the exact nature of the goods being delivered.
Financing purchase orders means getting access to the money those orders represent so you can fund the manufacture or procurement of the goods needed to fulfill the order, so it’s an opportunity to never have to turn down a surprise order again, even if you’re already busy. Getting that advance allows you to meet cash flow needs while having the working capital for raw materials, short-term equipment rentals, and even temporary labor. If you manufacture or trade in goods, you need to look at what purchase order financing can do to give you the ability to increase your market share.