Trying to run a business can be a challenge when it comes to generating enough cash to pay the bills. If you're having a hard time meeting payroll or paying for inventory, borrowing money may be necessary. Sometimes, your business may not be able to qualify for a traditional loan because of a lack of business credit. If this is the case, purchase order financing may be exactly what you need to get cash quickly.
Purchase order financing is an area of finance in which a company borrows against invoices that it has already closed so that it can complete a purchase order. For example, if a company does not have much cash, it may not be able to buy the inventory that it needs to fulfill an order that it has taken. When this happens, the company cannot fulfill its obligation to the customer. With purchase order financing, the company works with a financing company to borrow enough money to buy what it needs. The loan is based on the ability of the customer to pay the invoice at some point in the future. Once the inventory has been purchased, the order can be fulfilled and the invoice can be paid by the consumer. The company can then pay back the purchase order loan to the financing company with that money.
One of the attractive features of purchase order financing is that it doesn't have strict credit requirements. In fact, the purchase order financing company may not be concerned about your company's credit at all. Purchase order financing companies are generally more concerned with the credit situation of the customer who is responsible for paying the purchase order. If the customer has a good payment and credit history, then the purchase order financing company will be more likely to approve an advance.
Although this can be an easy way to get some cash, it does not come free. Businesses have to be willing to pay the fees that are set forth by the purchase order financing companies. The purchase order financing company will charge a fee based on the total value of the purchase order cash advance.
If you're a business owner, you may be wondering if its worth getting involved with purchase order financing. Many business owners don't want to have to pay a fee to a financing company just to be able to fulfill a purchase order. While you may not like the idea of paying a fee, you have to think about what this small fee is getting you. If you're running a business and you can't afford to fulfill orders, you have no way of making money as a company. In this situation, it won't be long before you have to close your doors.
What it comes down to is whether you want to continue doing business or close the doors and stop any chance of success with this business venture. When you put it in perspective, the relatively small fee that comes with a purchase order financing agreement is well worth what it provides. If you don't necessarily have to use financing to stay in business, then you simply have to weigh the rewards of extra cash flow against the cost to receive that cash flow.