Purchase Order Funding is otherwise known as PO financing. The funding tool has become increasingly popular with small businesses resorting to the financing option to resolve their funding challenges. However, it is worth noting that it is not all smooth and rosy with PO financing and loans as funding solutions for small businesses.
What is PO Financing?
Purchase order is an arrangement where a third party agrees to give a supplier enough money to fund a customer’s purchase order. Purchase order loans can either finance an entire order or a portion of it.
Who Uses Purchase Order Financing?
Some of the types of businesses that use PO financing include distribution companies, outsourcing companies, resellers, retail companies, wholesalers, businesses with heavily seasonal sales patterns and enterprises with cash flow challenges that need to restock to fulfill their orders.
Pros and Cons of Purchase Order Financing
Pros of Using Purchase Order Financing
Allows small businesses take on orders they otherwise would not have been able to fulfill
Fast and easy financing once the borrower and lender form a good relationship
Saves time by not having to collect payments from customers
No monthly installments
Small business owners with bad credit can still get funding
Cons of Using Purchase Order Financing
It can be expensive when compared to other financing options
Customers may mistake the arrangement for a cash flow problem
It only covers the costs associated with producing or purchasing physical products
It may not cover smaller orders
It is not very flexible as it only covers purchase orders, limiting the use of the funds
Alternatives to Purchase Order Financing
While PO financing comes with several tempting features, it is worth noting that it is not necessarily the only financial vehicle for small businesses. Other options available to small businesses include invoice factoring, merchant cash advances, traditional term loans, and business lines of credit.