It isn’t uncommon for owners of small companies to ask What is purchase order financing? when looking for ways to gain some quick capital for mission critical operations. The thing is, however, that purchase order (PO) financing is something that might be ideal for a certain type of business in a certain type of situation, but it may not be something that works out in other scenarios.
In this post, we’ll explore PO financing and see just what you can use it for. Afterwards, you’ll have another bit of financial knowledge that will benefit you as an up-and-coming entrepreneur and will be that much closer to running your business with the best of them.
So, what is purchase order financing?
It’s a Way to Make Purchases Without Depleting Cash Reserves
As a small or medium sized business, you have to make sure that every dollar is spent wisely, right? That means that you need to be absolutely sure that you’re getting the best possible deal on supplies, equipment, and services that you need to run your business.
During the early years of a business, margins can be thin, so you can’t afford to let any of your resources go to waste. Still, cutting back isn’t an option. If you scale back on what you need to serve your customers, your reputation could suffer, people might turn to competitors, and you could lose market share quickly. That’s where PO financing comes in.
Whether your situation has your company seeing a lack of revenue as you attempt to turn your company around, or you’re saving your reserves for potential growth and expansion, you can use PO financing in order to continue operations.
When asking the question of “what is purchase order financing”, it’s important to think about how such a tool works as well.
In many ways, it acts as a form of cash. You can use a purchase order to pay creditors tomorrow for something that you’ll receive today, so to speak.
What happens is that you go through a PO financing company. That company then buys from your suppliers on your behalf.
The suppliers then fulfill their end of the agreement that your business has with them and the end product is delivered to your clients.
After the transaction is complete, the money from the letter of credit that the PO financing company drafted is released to the supplier and you typically have 30 to 60 days to pay an invoice to the PO financing company.
When to Use PO Financing
The question of “What is purchase order financing” goes hand-in-hand with when it should be used.
One such ideal situation for using this financial tool to further your business would be if one of your customers came to you with a large order that could potentially mean big things for your company.
While this is the break that you have been waiting for, the reality of the situation may be that you don’t have the capital or resources on hand that you need to make the order happen.
Bank loans may be out of the question as well, even if you have strong relations with your lenders.
When that happens, PO financing is your best bet for making that large order a reality so that you can deliver your product to your customers and grow as a company.
More About PO Financing: Who Uses Them
While many entrepreneurs may ask “what is purchase order financing”, they may fail to realize that the nature of this type of financial agreement limits exactly what kind of entrepreneur can use it.
These are the types of businesses that should typically be asking “What is purchase order financing?”
- Producers – If you make a product, then PO financing could be an easy way for you to secure a large amount of raw materials that you use as ingredients.
- Distributors – You may find yourself having to send out a larger volume of a product than you usually would. In that case, PO financing can help you reach that goal.
- Wholesalers – If you need to fill a larger than usual order with an existing customer, or are expanding to clients who purchase more than you normally supply, a PO financing may help cover the difference here.
- Resellers – Business owners in this industry who ask themselves “what is purchase order financing” can benefit from having more of a product to sell to customers by using PO financing.
If you’re a business owner who wants to fulfill larger obligations to clients, but you aren’t asking yourself “what is purchase order financing”, then you should be.
Remember, running a business successfully does not need to be complicated. Keep it simple!
For more information on business analysis, business planning, and ways to grow your small business profitably, please check out our website www.portalcfo.com. Follow us on Twitter @portalcfo
Manny Skevofilax is a consultant and speaker that helps his clients successfully navigate the challenges of growing their businesses profitably. Since 2003, Manny helps businesses enhance their results by using his experience in strategic planning, financial statement analysis, operations, organizational development, and team-building. His consulting firm, PORTAL CFO Consulting, Inc., has attracted clients from diverse industries in the United States and abroad.
Manny can be reached at 410-808-3441 or via email at manny@portalcfo.com.