Strong cash flow is important for any small business. However, sometimes circumstances beyond your control leave you short of cash. If at the same time important orders begin to come in, you may have insufficient funds to fill them. That’s where purchase order financing comes in. Here’s how you can use this method of funding to take advantage of opportunities you might otherwise need to pass up.

The Basics of Purchase Order Financing

Purchase order financing involves obtaining a loan to pay your supplier using your purchase orders as collateral. Some lending companies may cover the entire cost to the supplier, but most lenders loan you a portion of it and expect you to pay the balance. The application process takes one to two weeks, and interest rates vary between 1.6 and 6 percent per month.

Purchase Order Financing Step by Step

The first step involves receiving an important order from a client. You don’t want to delay filling the order and risk losing the customer. For this reason, you accept the order, put in an order to a vendor for the supplies you need, and receive the invoice. If you are unable to cover the entire amount, you apply to a lender for purchase order financing. In some cases, the lender will finance 100 percent of the order, but most likely you will receive 90 percent or less.

The lender then pays the vendor, and you add whatever balance the lender did not cover. The vendor sends the supplies you need, and you fill the order. You invoice your client, and your client pays the lender instead of you. When the invoice is paid in full, the lending company deducts its fee and then sends the payment on to you.

Benefits of Purchase Order Financing

Purchase order financing allows you to take on large orders that you would otherwise be unable to fill. This form of funding is far easier to obtain than traditional loans from banks. You can receive this financing even if your credit score is not high, because the lenders are more concerned with the creditworthiness of your clients who are paying the bills.

For more advice on purchase order financing, contact Aspen Commercial Lending.

For other ideas on how to increase cash flow in your business, we recommend you read this book.