Purchase order financing is an often under-appreciated option for companies in need of a cash flow boost. To help you decide if it’s right for your business, this post goes over how purchase order financing works and the situations in which it shines.

The Basics

As explained by US News and World Report contributor Rebecca Lake, purchase order financing works in the following manner: A customer orders goods from your business, and then “you request financing from a lender,” basing the sum requested on the purchase order’s size. After that, the lender pays the manufacturer your business works with to make the goods and deliver the order to the customer. The customer then pays the lender. The lender, in turn, deducts its fee and sends the remaining proceeds to your business.

Who Qualifies?

Not all businesses or situations are a fit for this type of financing. For instance, service-based businesses typically do not qualify. Businesses that “sell materials rather than finished products” also are not a fit, according to Lake. Additionally, lenders may balk at dealing with customers who are not creditworthy. 

However, goods-based businesses that have trustworthy customers can make great use of this financing option. And orders with healthy profit margins—i.e., 20 percent or higher—are particularly well suited for purchase order financing.

When and Why Do Businesses Use It?

Businesses often make use of purchase order financing when they need an up-front injection of cash to meet a large order from a customer. The financing option offers several attractive selling points. Businesses with less time in business may have an easier time pursuing it than traditional loans, which tend to have strict requirements. Additionally, financing through purchase orders is a relatively speedy way to obtain funding, making it ideal for when time is of the essence.

Want to learn more about your financing options? Get in touch with Increase Lending or take a look at the rest of our blog posts today!