How Startups Use PO Financing

A startup company can face many difficulties in its inception. One of the trials that a new entrepreneur may not expect, however, is the cost of success. If you create a product that does well with its customers, you may find yourself getting orders larger than your company has planned to handle. Figuring out how to conquer this challenge is essential for a business to make it. One option that may work is PO financing.

Many new companies nowadays rely on third parties both to manufacture and distribute their products. Working with third-party retailers and vendors saves on the effort and money needed to build a sales infrastructure. However, if your company’s product happens to take off, a major retailer may place a good-sized purchase order. For a big company, an order costing hundreds of thousands of dollars is not unreasonable, but a small startup may struggle to fund the production to meet such an order. Manufacturers are not likely to work on credit with a new company, and getting bank loans is equally difficult. But failing to fill a major order can destroy the confidence of customers and vendors in a company.

Purchase order financing can be used to cover this gap between supplier and vendor. Rather than relying on a company’s equity to make a loan, in PO financing, a finance company uses the purchase order itself as collateral. The company pays the manufacturer to produce and ship the product. Once it’s received and inspected, the vendor pays the invoice, concluding the order and settling the transaction.

This system of financing can be scaled to any size without trouble, allowing even small startups to fill substantial orders. It also doesn’t require a company to give up any of its equity, since it’s transactional funding. PO financing can also be combined with invoice factoring, with the proceeds from the factoring used to close the purchase order line, often lowering overall costs.

Purchase order financing does have a few requirements that must be met. It generally is only effective with products with a high profit margin, somewhere between 20 to 30 percent. It also is limited to companies who use reliable, established third-party manufacturers to supply their products. Also, because it can take several weeks to underwrite a transaction, it works best when lined up ahead of any major purchase order.

Not every startup can take advantage of PO financing. However, those that can may find it an ideal solution to sell their product and build their business’s reputation.

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