The right type of business can build a success plan that scales with the company with a little planning and the right purchase order financing. What type of business is the right type? Well, for this financial instrument, your company does have to manufacture or trade in goods in a way that leaves you with open orders for pre-sold merchandise you need to fill. This is common in manufacturing, where an order needs to actually be built before it can be sent out. It’s also common with some forms of international trade, but you will want to talk to a lender about your business to be sure they see you as a good fit.
The reason this instrument is so powerful is because it gives you access to the funds from the pre-sold merchandise before it’s sourced or built, allowing you to use the value of the order to pay for the order. The result is that you can now take large surprise orders confidently because you can get the costs for supplies and labor out of the money that will be coming in after delivery.
If you’re familiar with accounts receivable financing, then purchase order financing will seem very familiar. The difference is that when you finance your accounts, only invoices for work that has been completed and delivered can be considered for an advance. When you finance purchase orders, only orders that have not been completed and delivered can be considered. Generally, this means that if your business can finance purchase orders, you can also finance accounts when needed. It does not mean the reverse. Many companies qualify for accounts factoring but not purchase order advances.
Once you have found a lender and you know your business qualifies, the next step is to build the cost of financing the purchase orders into quotes for orders that are likely to be financed. This way, you can get access to the working capital you need without cutting into your profit projections. It might put a slight premium on rush orders, but that is usually expected anyhow.
Alternately, you could plan to finance all orders and work the costs into your overall quote structure to simplify the collections process later while making your cash flow management much easier. This is possible by making it so you never have to worry where the cost of your raw materials and labor will come from when you get an order. It’s just a matter of building a relationship with a lender you know you can count on and a plan for absorbing the fees from purchase order financing into your price structures.