Purchase Order Financing offers an opportunity for companies to access capital to complete more orders. Purchase Order Financing is simple. Your company receives an order from a customer, but lacks all or part of the funds necessary to complete the order. Purchase Order Financing allows you to use the customer’s order as collateral for a loan of up to 100% of the cost to manufacture and ship the product. Loan approval typically takes less than a week. A Purchase Order loan can give your company the liquidity it needs to accept and complete the order, rather than having to turn it down because the company does not have sufficient liquidity.
How It Works
Applying for Purchase Order Financing is easy. Contact Abington Emerson Capital once you have a confirmed purchase order from your client. We will require you to provide us with a copy of the purchase order, documents concerning the legal formation of your company, and your company’s financial statements. Our evaluation will be based on the reputation of the purchaser, the legal standing of your company and your expertise in the industry.
Our help does not stop when the loan is approved. Once approved, Abington Emerson Capital will work with you to pay your suppliers and shipping agents and ensure a timely distribution of funds, so that you can complete your order.
Scenarios Where Purchase Order Can Help
Purchase Order Financing offers a liquidity option for a wide variety of businesses. These can include start-up companies that have not established a credit history and companies that may have poor credit or have difficulty obtaining traditional financing. Purchase Order Financing can be used to meet large orders, weather seasonal cycles, or manage other cash flow challenges. It fills an important gap that traditional business financing cannot meet.
Some typical scenarios in which purchase order financing is used include companies that may have one or more of the following characteristics:
Start-up companies often have a limited history, which restricts their ability to access traditional financing. Even though a young company may be thriving, the lack of an established credit history will limit the number of financing options that are available to it. In a Purchase Order Loan, the strength of the transaction and the company’s ability complete the order is also considered. This allows companies with a good track record of performance and a reliable customer relationship to access financing, even though they may have a limited credit history.
Poor Credit History
Companies that are in a turnaround situation or may have a poor credit history, may also access Purchase Order Financing when traditional small business loans or other financing options are not available to them. Because the loan is secured by the purchase order, the company is able to borrow funds and obtain liquidity that might otherwise be unavailable.
Fast-growing companies often face a scenario where the demand for their products or service outpaces their ability to obtain the capital they need to fuel their growth. Traditional small business financing and bank loans often do not expand quickly enough for fast growth companies. This can be because the approval turn around time for a traditional small business bank loan is too slow to meet the needs of a fast growing company.
Also, if a company is experiencing a dramatic growth in their business, the true financial strength of the company may not be accurately reflected in their most recent financial statements, which is often the primary tool traditional business lenders use to assess creditworthiness. Because Purchase Order Financing is transaction-based lending, it can provide fast-growing companies more efficient access to liquidity.
Seasonal business often experience times of extreme spikes in sales that strain cash flow and make it difficult to manage their business. Companies that are in a seasonal business must not only cover the payroll and material costs during the ramp up period, but also ensure they have sufficient capital to take full advantage of the busy season by ordering/producing enough product. Purchase Order Financing can help smooth these liquidity spikes and allow a company to achieve to its full potential during its high season.
Not Bankable or Unable to Obtain Credit
Companies that are not bankable by traditional lending institutions or cannot obtain acceptable financing from suppliers or vendors can benefit from Purchase Order Financing. Lending decisions in Purchase Order Financing are based on the characteristics of the individual transaction. This allows companies that do not have access to traditional financing options to be approved for a Purchase Order Loan and receive the liquidity they need.
Who Can Benefit from Purchase Order Financing
Purchase Order Financing can help a wide range of businesses meet their liquidity needs. Typically, companies that sell a product to another business are in the best position to take advantage of Purchase Order Financing. This can include manufacturers, wholesalers, resellers, distributors, and importers, which often use a Purchase Order Loan to better manage cash flow.
Some common types of companies that take advantage of Purchase Order Financing include:
- Manufacturers who have received a large order and need capital to purchase the supplies they need to complete it
- Wholesalers or resellers, who have a confirmed retail buyer, but need financing to purchase the merchandise from the manufacturer
- Distributors that need short-term liquidity to meet customer demand
- Importers that require financing during the manufacturing or shipping of goods
Debt vs. Equity
When faced with a liquidity challenge, many new businesses often seek investors to add money to their operations. However, commercial loans such as, Purchase Order Financing, offer some real advantages over seeking investors for your business. Using strategic debt, such as Purchase Order Financing, may be a better option for many companies.
There are many things to consider when deciding between issuing equity and taking a loan to create liquidity. The decision between debt and equity can have a significant and long-term impact on the value of the company and the return the founders or current owners receive. By making the wrong choice, an owner can significantly dilute their long-term value to meet what is simply a short-term liquidity challenge.
When deciding between debt and equity to create liquidity there a number of important factors to consider. A commercial loan, such as Purchase Order Financing, allows you to:
Maintain your ownership stake. A loan can be an important tool for stabilizing and growing your company. Unlike issuing equity, which dilutes an owner’s stake in the company, a loan is generally secured with your company’s assets and does not require a business to give a piece of the company to gain short-term liquidity. In the case of Purchase Order Financing, the loan is transaction-based and secured by the value of the merchandise included in the purchase order.
Keep control. A lender will base their credit decision on their opinion of the potential success of your business. Unlike an investor, their primary concern is your willingness and ability to repay the loan, not the long-term strategic direction of the company. As such, lenders rarely get involved in the operations of a company. An investor’s role in a company can vary depending on the investment criteria, but generally investors require some say in the company’s direction in return for their investment. A Purchase Order Lender is going to be primarily concerned with the characteristics of the individual transaction, rather than the company’s business strategy. Unlike a potential investor, a Purchase Order Lender will be less concerned about the long-term strategic direction of the company.
Have flexibility. The terms of a loan can be negotiated to fit individual business needs. Commercial loans can be as short as 60 or 90 days, which gives business owners the ability to smooth out liquidity challenges without making a long-term commitment. Adding another investor, or investors, to a business by issuing equity creates a much longer-term relationship. Once an investor puts money into a company, they are a part of the company until they decide to sell their stake. A business owner’s ability to recapture equity once it is issued can be very limited. This can affect a business owner’s flexibility in deciding the direction of the company.
The decision to apply for a loan should be made after careful analysis and consideration of the current and future financial performance of your company. You must be confident that your company will generate enough revenue in the future to cover your expenses and make loan payments. If you do apply for a loan, take the time to understand every term and condition of the loan. You should never hesitate to ask your lender a question.
In considering Purchase Order Financing, it is important to fully understand the range of risks involved in the transaction. This can include factors such as the supply chain, shipping delays or disruptions, or buyer counter-party risk. A Purchase Order Financing lender will review these and other characteristics of the individual transaction to determine if it is appropriate for Purchase Order Financing.
Remember, the most productive loan is one that helps your business grow.