Many businesses especially small and medium-sized businesses find themselves stuck in a hard place when it comes to managing cash-flow. They need to have powerful capital to purchase new items and equipment materials, cover advertisement costs, hire more employees, etc.
Businesses explore many business loan options. Purchase order loans and purchase order financing are sometimes perceived as the same thing, but they are different from one another. There are many differences between purchase order financing vs factoring.
They have similar wording. But it is extremely important to understand that a purchase order loan and purchase order financing is not the same thing before signing any agreement. It is very important to understand what is purchase order financing and purchase order loan before you move forward and select either one of them.
Purchase order financing or PO financing is an option of funding for businesses that need cash for multiple or single customer orders. In several companies, the cash flow problem does exist and becomes a very pivotal issue with the growth and development of the company and the business. Sometimes there will be situations where there is not enough money to cover the costs of running a proper business. There may be orders from different clientele that you fail to complete due to cash problems, sometimes you might not have proper resources and supplies that are needed to meet the client’s needs. This would lead you to turn down the order of the client which would negatively affect the revenue and the reputation of your business.
The reputation of your company and business will highly be affected and if this information gets around that your company is not able to complete jobs, and is turning down business that would directly affect your trust with the customers. Other companies and groups who give you their business and trust might think twice. To avoid such situations and scenarios, companies need to find ways to get the money they need. Purchase order financing is a great way to deal with this problem.
PO financing has one company paying the distributor and supplier of another company, for stocks and commodities that have been ordered to complete a job for a client. It is an advance. This financing may not be for the complete amount and bill of the supplies, but it covers a good portion of it. But there are some cases where businesses could be eligible for 100% financing.
Many options are available today in the market. In a purchase order financing there are majorly two options that are available for you to select from. Firstly, the PO Finance company would gather and collect the account and bill from the end customer or client. The PO Finance company then charges the company in need of funds for different purposes and fees and makes its money. These fees are from the assemble account or invoice, the remaining amount is returned to the company.
The second option is when the PO Finance company opens up a line and stream of credit with the supplier and distributor. This credit will be opened in their respective names and be backed by them. Businesses with poor credit and not sufficient assets to get the supplies they need, this line of credit becomes very beneficial.
A purchase order loan or a working capital loan is a different funding option For many businesses, the most practical way to maintain a good working capital without risking the business is to secure an unsecured loan. They are difficult to get if you compare it with a secure loan. Secured loans have lower interest rates, longer repayment terms, and better limits. But if your business and company have a great credit history, big banks accept small businesses to get an unsecured loan. Purchase order loans offer business financing with repayment terms up to 36 months. The size and volume of the loan will depend on the company’s credit history and form. Business owners and companies may have to submit a personal guarantee to receive unsecured loans for a larger sum.
Purchase order loans do not depend on the details of transactions. They are more flexible and are cheaper than purchase order financing. Order loans can be very helpful if you want to maintain a short-term project like orders for new items, new customer orders and big orders that exceeds your funds. Purchase order loans do not have the limitations of purchase order financing. You can use purchase order loan to fund any part of the production procedure. This makes purchase order loan a better alternative to PO financing.
Short term loans and purchase order financing have a lot of similarities, but they are structured differently. The short term is an installment loan. You can pay back the money to the lender over several months, in weekly or daily installments. You could also pay staff, pay for advertisement, or other business activities with short term loans.
In purchase order loans, you do not sell your orders to any third party. Your clients only deal with you and nobody else. As a result of this, you keep the full amount of the purchase order when it is paid because there is no third person or a middle man to take their cut and fees. You do not have to pay your loan back completely when the invoice is paid, you get to pay back a fixed amount every day. This way, you don’t have to keep getting a loan to have access to the funds you require. With a purchase order loan, there is no pre-payment punishment, you can reduce your interest by paying your loan back early.
Trying to understand the benefits and just the basis of purchase order financing and purchase order loan is very important for small business owners who are looking to consider the option of purchase order financing or loans. It’s very important to understand the different options and alternatives that are available to bring extra funds for your small business.