Do you have a client who is eager to get a project underway, but you don’t have the capital to put out the right resources? Are you waiting on other customers to pay their bills, so you have the funds to move into another job? These circumstances are rough, forcing proprietors to turn down profitable projects because they don’t have the resources to do more. There is a way around the situation. Purchase order finance is a means of securing revenue for product orders when your budget is stretched thin. Before taking up the option, consider the following four things.
1. Who Fronts the Money?
Do you need wood for a construction job but can’t pay the bill right now? When your funds are depleted, you can seek a loan through purchase orders. A factor approves the PO, offering the credit and directly paying the supplier. Your company does not handle money. The factor does. You get reimbursed after the customer pays.
2. Is There an Extra Cost?
A bank would collect interest. These establishments operate differently, receiving their funds immediately upon your payment. Because factors put money upfront, the lender demands a small fee. Expect to have that removed directly before the money is sent to you. Always check on the amount before you sign a contract. Also, make sure that you can afford the deduction and still come out good on the project.
3. How Is the Factor Paid?
Typically you have money come in and go out, dealing with your receipts and invoices on your own. This system operates differently. Once the client has the product, submit an invoice to the customer requesting compensation for goods. This payment and the invoice are sold to the factoring establishment. They subtract their amount and send you the rest.
4. Why Would You Use This?
Is this risky? What are the benefits of factoring? Purchase order spending is designed to alleviate the stress of waiting for bills to be paid by other clients. When current accounts are exhausted, you may have to turn down opportunities that, in the long run, would be good for your company. Purchase ordering allows for project continuation when your funds are tied up for other reasons. It’s a chance to expand the business and take on work that otherwise would not be available.
Expansion is possible without asking for a bigger loan from the bank. Consider other avenues as these could open the door to significant opportunities.