Purchase order financing is another attractive way for a small business to raise working capital. However this form of finance is not about getting a conventional loan against a purchase order as collateral. There are strict criteria that must be met in order to receive purchase order finance.
As a short term loan, purchase order finance offers money to pay suppliers for any received purchase orders. A business that has received a purchase order will ordinarily accept the order even though they lack working capital. This is because the PO can be used to fulfill even large orders without any long commitments.
A business can avail PO finance on several criteria. They must not make any alterations in the goods they deal with or trade. They should not be in direct manufacture of those products. The gross margins may be required to be minimum twenty percent, and the suppliers should also have a healthy history of operations and finance.
PO finance usually works well for high volume purchase orders, and is resorted to by distributors, manufacturers, or those in export and import business. The loan allows them to pay upfront their suppliers upon receiving a large order. Their own revenue may come in later after a few months. Since lack of money can cause disruptions or perhaps even the order can’t be taken, PO financing comes to the rescue. Going to traditional banks for a loan can be a lengthy process with its well known hurdles and requirements.
PO financing and loans are unique for each case, and many factors go into determining the interest rate for a month. For instance, upfront payment, contract based delivery or the waiting period for the invoice payment.