Loans can help businesses meet their working capital requirements, pay their employees, and buy raw materials. Getting a loan won’t be a problem if a company has a decent credit history and profit margin. Most banks offer credible businesses loans at appealing rates, but that does not mean taking out a loan is the solution for all capital needs.
Businesses are better off with other financing tools in specific situations. For instance, when fulfilling a large purchase order (PO), a company may choose PO financing instead of a bank loan. Let us understand the rationale behind it.
What is purchase order financing?
Purchase order financing is often confused with invoice factoring, but the two couldn’t be more different. Purchase order process involves acquiring funds from a lender to meet the capital requirements of a large order. Businesses that do not have the cash flow to fulfil an order can use purchase order financing to prevent loss of business.
The business acquires funds from a lender for paying suppliers in purchase order financing. Once the company receives the finished goods from the supplier and sends them to the end customer, they invoice the latter. The lender gets the money back from the company once the end customer clears the invoices.
While any business owner can use purchase order financing option as a funding option, it is more beneficial for the following businesses:
- Distributors of goods
However, every company must fulfil basic requirements to seek business financing from purchase order financing companies. The requirements include a clean history with suppliers and customers and a decent credit score.
Pros and cons of purchase order financing
Seeking help from the best purchase order financing companies can help businesses face obstacles with strength. However, they must be aware of the pros and cons of purchase order funding before they opt for PO funding. Here’s an unbiased guide to the financing tool.
The key advantages of using purchase order finance include:
- Quick access to cash
Speed is one of the standout features of purchase order financing companies. They assess and approve funding requests quicker than any bank. The best purchase order financing companies can release funds into a business’ account within 24 hours, which is almost unimaginable when working with a bank. Platforms like YubiFlow are even quicker, as they adopt a digital approach and have a large pool of anchors and investors.
- Easy repayment
Since purchase order financing is not a loan, businesses do not need to worry about expensive EMIs and interest. They can repay the lender or investors on YubiFlow and similar platforms as soon as the customer clears the invoice. It saves a lot of money and is cheaper than taking out a business loan.
- No collection risk
A business loan is a standard financial transaction between businesses and lenders. The latter provides a certain amount to the former, charging some interest. That’s it. If customers fail to clear their invoices, businesses pay the lender. They cannot avoid making the payment because the customer didn’t pay them.
Purchase order financing mitigates this risk. Purchase order financing companies are responsible for collecting the invoice amount from the customers. Businesses, therefore, are not at risk if customers fail to make payments.
Purchase order financing is a valuable tool, but it also comes with certain risks. Even with the best purchase order financing companies, some issues cannot be avoided. Here are a few of them.
- Upfront fee
While purchase order financing companies do not charge any interest, they demand an upfront fee. Businesses must pay the amount even before they get the money they want. The amount of upfront fee varies depending on the size of the purchase order financing company. Businesses must factor in the upfront fee before choosing a purchase order financing company.
- Strained customer relation
One of the critical drawbacks of seeking help from a purchase order financing company is that it might strain customer relations. When businesses take funding from a purchase order financing company, they lose the right to collect the invoice amount from their customers. The financing order financing company does that and stays in touch with the customer until the amount is paid. It can harm customer relations, as they may not like their invoice being sold to a third party.
- Not a long-term solution
Purchase order financing is a short-time solution to a business problem. It does not solve anything in the long run and could, in fact, affect future orders. Using purchase order financing demonstrates potential issues in a business, which could prompt customers to seek other solutions.
Hence, businesses must evaluate everything before contacting a purchase order financing company. It is a helpful tool with significant advantages over business loans, but certain risks exist. A thorough study of its pros and cons can help businesses decide whether or not they can work without a purchase order financing company.