All business owners are aware of the need for strong and steady cash flow in their companies. However, sometimes despite your best efforts funding runs short, and if at that time orders from reliable customers come in, you are faced with the dilemma of how to obtain the financing to fill those orders. One solution that works well in this situation is purchase order financing. Here is what you should know about how this form of funding works.

What Purchase Order Financing Means

Purchase order financing involves the use of the orders you have received from customers as collateral so that you can obtain a loan to fill the orders. The lender pays the supplier or manufacturer directly, and they then send your customer the goods. Sometimes the lender assumes the full cost of the order, but usually the financing company handles most of it and then you pay the rest.

The Basic Steps in Purchase Order Financing

First of all, a customer sends your company an order. You don’t want to refuse or delay the order because you risk losing the customer, so you seek funding to pay for it. After sending your supplier the details of your order and receiving an invoice, you apply for purchase order financing. The lender sends the supplier all or part of the cost, and you pay the balance. After the supplier fulfills and delivers the order, you send the customer an invoice. However, the customer pays the financing company, which deducts the amount of the loan and its fees and then sends you the rest.

Advantages of Purchase Order Financing

Purchase order financing allows you to accept and deliver customer orders for which you otherwise lack necessary funding. Because the lender is primarily concerned with the creditworthiness of your customers, you can receive financing even if you are in debt or have not yet established a solid credit score. You are not required to pay back the loan on a fixed schedule, since repayment depends on when the customer pays the bill.

For more information on purchase order financing, contact LMC Alternative Business Capital.