Getting large purchase orders is an exciting time for small business owners. But a lot of companies, especially newer ones, don’t have sufficient liquid cash to fulfill these purchase orders. To solve this dilemma, you might want to check out purchase order financing (PO financing).
Purchase order financing provides you with the working capital needed to pay your suppliers to deliver the goods to your customers. The PO financing company will pay your supplier; your supplier will then manufacture the goods and deliver them to your customers.
Unfortunately, PO financing is very limiting. It only covers businesses that sell physical goods, it can only be used for purchase orders, and most of the time, it doesn’t cover small purchase orders. If you can’t qualify for PO financing, you can check out other financing options. Here are some of the most common alternatives to purchase order financing.
This type of financing involves selling your unpaid invoices at a discount to third-party companies in exchange for a lump sum. Lenders may give you up to 80% to 90% (sometimes even 100%) of your total invoice value upfront. The remaining balance, minus a small fee, is given once your customers pay their invoices to the third-party company. Many business owners prefer invoice factoring because of its convenience. However, keep in mind that it’s one of the most expensive forms of financing. Make sure the cost is worth it before proceeding.
Business Lines of Credit
A business line of credit is one of the most flexible financing options in the market. Once approved, the lender you’re working with will assign you a prearranged credit limit. You can withdraw from this credit limit anytime you want and you only have to pay interest on the money you’ve withdrawn. However, there may be fees when it comes to opening and maintaining the credit line. A business line of credit is usually revolving. This means that if you repay what you’ve withdrawn, your credit limit goes back up again without having to reapply. But make sure not to go beyond your credit limit to avoid cash flow issues.
Merchant Cash Advances
If your company mostly processes credit card transactions every month, you may be eligible for merchant cash advances (MCA). With an MCA, you can receive a cash advance by leveraging your card transactions. Lenders give you a lump sum in exchange for a fixed percentage on every card transaction. This means that you don’t have to worry about fixed monthly installments. However, keep in mind a merchant cash advance is very expensive. For example, you owe 10% of all credit card transactions each month until your debt is paid. This sounds reasonable until you figure out that lenders debit your account daily. Your business has to be profitable to keep up with the steep payments. Make sure to assess your company before you go for a merchant cash advance.
Traditional Business Loans
Traditional loans from banks used to be the primary funding option for small and large companies alike. But ever since the financial collapse of the U.S. economy, banks are now hesitant to fund small businesses. Recent studies show that they only approve one out of four business loans. Banks prefer to lend to large businesses with near-perfect credit, cash flow, and track record. Some banks will still fund small businesses, but it will take some time before you receive a decision. If you are approved, you’ll likely wait another several weeks or months to receive the funds.
Loans from Alternative Lenders
Due to the lack of financial support from traditional lenders, alternative lending companies have recently emerged to finance small businesses. Alternative lenders offer different types of loans, so you’re sure to find one that best fits your business. Most of these lenders also operate online, making the application process fast and convenient. However, loans from alternative lenders are often more expensive than traditional loans. You’ll also be liable to repay the lender, plus interest, even if your business goes bankrupt.
If you don’t like to take on debt, outside investors can help finance your business as well. An investor with the right industry experience and network can help your business grow. If you decide to sell equity, keep in mind that you may have to give up some control over your business. This may also cut down your profits, as you’ll have to share it with other investors.
Learn More About PO Financing Alternatives Today!
Whichever you decide, make sure to assess your business to determine which type of financing route is the best for you. Whether it’s PO financing, business line of credit, or a merchant cash advance, the right type of financing can take your business to the next level.