If you run a small business that supplies goods to a large retailer, you will need cash to complete your orders. Once you have handled the first few small orders well, there may come a time when your customer is ready to give you a large order. While this will be an opportunity to grow your small business, there are several challenges you should consider as you work on fulfilling the order.
To keep your business running, you can pay your suppliers upfront for the goods you need. However, this may be a challenge if you do not have enough money to cover the costs. An alternative would be to apply for a bank loan, which will require you to have operated your business for some time or have healthy financial statements. The other method would be to have your customers pay for the goods maybe 30 or even 60 days after delivery. Taking this step may lead to cash flow problems that could impact the financial health of the business.
Purchase Order Financing
In the event that you decline the order, you run the risk of losing your customer to a competitor and missing out on an opportunity to take your business to the next level. Purchase order financing can help you to fulfill the big order, earn more profits, and take your company a notch up. Provided you have a reliable customer to back the purchase order, the financier will send your supplier a Letter of Credit that will serve as a guarantee for payments. In essence, you will not have borrowed the money but will have found a way to facilitate the transaction.
Is Purchase Order Financing Right for You?
Before applying for purchase order financing, you will need to know whether you are eligible for this type of loan. While every case will be considered on its own merits, some of the general qualities are that you should trade in manufactured goods rather than services. Also, the profit margin you expect to earn upon supplying the goods should be at least 20 percent, and your customer has to be a creditworthy and established entity. If your business meets these requirements, purchase order financing may be what you need to expand your business.
When looking for a financial lender, you should try to identify one that understands your business and offers customized solutions to help you maximize your profits.