If you’re familiar with factoring, selling an invoice at a discount to a factor to access your money more quickly, you won’t have too much difficulty understanding Purchase Order Financing — it simply takes the concept to the next logical step.
A year or so ago I spoke with a consultant who had just landed a considerable contract with the federal government. As a small consultancy, there was a need to ramp up to start servicing the contract, but revenue from their invoice to the government would come roughly 45 days after it was submitted. It looked like there would be approximately a 15-day gap between when the expenses of expansion were due and when the government paid the invoice. This created a short-term need for additional cash that wasn’t available from cash flow.
Opting to finance their purchase order with the government, they were able to ramp up to service the contract, maintain their normal cash flow, and meet their financial obligations during the 15-day lag.
Over the last several years, more and more companies are offering P.O. financing, including Wells Fargo Bank and a cadre of other traditional and alternative lenders.
Nevertheless, P.O. financing is not the silver bullet to most small business finance needs. It can be a viable option when a small business needs short-term capital to ramp up for a big order (like the scenario described above) or provide the cash a small manufacturer might need to tool up to make a new product. Like factoring and other alternative financing options, it comes with a premium and small business owners who would like to leverage this financing vehicle will want to make sure the numbers make sense before they jump in with both feet.
Along with the ability to access capital quickly, a small business owner’s credit rating is of less important than the profitability of the purchase order. This make purchase order financing a popular option for business owners with a less-than-perfect credit rating to access capital quickly to fuel growth and expansion.
Here at Lendio, we’re passionate about providing small business owners with the opportunity to get the financing they need to build their business. Find out which business loan is best for you.