Ever had to turn down a job because your bank account couldn’t handle the upfront expense?
Maybe it was a large construction client that only pays in installments, or maybe it was a large client that’s stocking up on product – and can’t pay for 30 days…
But either way, it’s not fun. You’re losing business because you don’t have the cash to get it – sounds like a vicious cycle to me.
And it’s unfortunate that so many small businesses have to go through this.
It’s unfortunate because of the obvious reasons (limited growth), but the pain point hits a little deeper for me.
It’s the same reason why I started this business, but it seems these alternatives are not known by most business owners.
And if a business owner does know about it, the process usually scares them away. It’s considered alternative because it’s not normal, which usually means it’s not easy (unless you have help, of course).
So what’s this alternative route that I keep praising?
Purchase Order Financing
The names pretty self-explanatory, but I wanted to give a brief overview before we get into the good part.
Purchase order financing is simply getting cash to fulfill your purchase orders. The same purchase orders that you receive from a client when they need a product shipment or service.
The financing process is similar to Accounts Receivable Financing, just happens before the job starts – not after.
And just like A/R Financing, a lot of the underwriting focuses on your buyer – but they’ll also make sure you know what you’re doing.
They do this because the buyer is really the one that’s repaying the loan (when they send payment for the delivered goods), but they also need to make sure that you can deliver the goods.
Once you pass the underwriting test, it’s smooth sailing after that….
It starts when you receive the purchase order. You take a look, see that the upfront expense would hurt your cash flow – so you decide to finance it.
You send the purchase order over to the lender, they’ll “buy” it – and send the cash your way.
Just don’t be surprised when the cash is a little less than the amount on your purchase order – they have to keep a small fee (their form of interest).
You get the cash, buy the materials, deliver the order – and then, well…that’s really about it on your end.
The buyer will make their payment when it’s due (likely on the last day), and when they do – it’s sent to the lender (don’t worry, your client won’t know. They just think you got a new account or P.O. Box).
And just like that, the problem is solved. You get the cash up front and take on big jobs.
You’ll be out a few bucks for using this option, but you wouldn’t have got the job without it – so I’d say it’s worth it.
Related: Sounds great, but not quite what you’re looking for? I bet you’ll find your ideal solution in our Cash Flow section.
At the end of the day, as long as the job gets done (in an ethical way) – any route is a good route…
BUT, that doesn’t mean you shouldn’t look for the best route.
Cost is usually the largest factor, but other items come into play as well – like how much cash you can get and repayment terms.
And here’s why many business owners love this route:
- Ease of Use – You’re an entrepreneur, you already have enough on your plate – so why not make it easier when you can? Purchase Order financing makes your life easier in many ways, it actually seems like it was made with this in mind. You simply submit a purchase order, receive cash, and worry about your business. The buyer pays off the debt when they need to, but again – they don’t know this.
- Underwriting – I’m preaching to the choir, I know – but getting a loan can be tough. Not only do you need to round up all of the necessary documents, but you also need to make sure that your Current Ratio is above 1:1, your Leverage is under the industry standard, and your Debt Service Coverage is above a 1.20x….who’s got time for that? Not Purchase Order Financing, and that’s why they make it simple. If you have quality clients (bigger the better, anybody will finance Wal-Mart’s purchase orders) and a proven history of delivering – then that’s 90% of the battle. And I don’t know why I consider it a battle, because without it – you’re probably not in business…
- It’s a Kickstart – Don’t get me wrong, I’m not saying that this type of financing is necessary for your business. You could bootstrap, save up the cash, and slowly grow – but who wants to be a startup for that long? I don’t like to speak for anybody, but I have yet to find anybody that loves tight cash flow and sleepless nights – so I think it’s safe to say that nobody wants this, and that’s why everybody loves a kickstart. You’re not tied to a long-term loan and you don’t have to worry about monthly payments, you simply get the cash to grow fast. Sure you’ll end up paying more interest than bootstrapping, but if the kickstart creates a higher profit….than how’s that bad?
I honestly think this is a great product for any business, and it’s hard to find the disadvantages….but like everything else – they’re there.
And here’s the biggest 3.
- Increased “Interest” Expense – I know, I’m now considering this a disadvantage when I just finished the benefit section asking why this would be a disadvantage – and that’s only for some companies. Some companies have been around a little longer and don’t need a kickstart, they simply need something to cover a short-term gap. Their financials are likely strong and they don’t have to worry about alternative routes, they can go out and get a line of credit for cheap.
- Fast Growth – Here’s another one that could go in both categories. Of course fast growth is great, but you just have to make sure you’re doing it the right way. Taking on too much business is usually a good thing…unless you’re over your head. As Ben Franklin once said, “If you fail to plan, you plan to fail”.
- Reliance – I don’t think this is specific to just Purchase Order Financing, it really applies to all forms of financing. Don’t get me wrong, I strongly support financial solutions and know they can do good things – but there can be too much of a good thing. Some owners love the fast growth and continued success so much…. that they forget to stop and stabilize. Remember, this type of financing is a kickstarter that allows you to launch….it’s not a constant stream of financing that you’ll rely on for 20 years
And that’s the main 3. Again, I don’t think these disadvantages are something to be afraid of – but rather, something to be aware of. They’re all easily avoidable and if you can avoid them, you might have financing that provides a lot of benefits and little disadvantages.
Purchase Order Financing – Recap
As part of the Cash Flow Solutions family, Purchase Order Financing is another great option that’ll help your business grow.
In this case, you get cash for your Purchase Orders – allowing you to fulfill any job.
The benefits are great and the disadvantages are minimal, so why wouldn’t you use this option?
The only reason I can think of – is if you don’t have purchase orders. And if that’s the case – please visit our Cash Flow page, I think you’ll find a few other options that can help you.
And as always, if you have any questions on whether this product (or any other) will help your business grow, PLEASE – let me know. You can schedule a quick call here – you’d be amazed how much we could accomplish in little time.