4 Myths About Purchase Order Financing
What is purchase order financing? It’s a type of loan where the lender gives you money to pay your supplier so you can deliver goods to your customers. This can be effective when your company has significant sales but not a lot of capital on hand. It’s similar to invoice factoring but involves your purchase orders for suppliers instead of invoices for customers.
Here are 4 common myths that prevent some business owners from pursuing this valuable financing tool:
Myth 1: Purchase Order Financing Isn’t Safe
Some business owners believe they’re putting their business assets at stake by applying for a purchase order loan. However, this isn’t the case. The purchase orders and customers your business has served as collateral to back this type of loan. Money is extended based on the amount of the purchase order, and the capital is delivered directly to your suppliers. This means that your business doesn’t have to worry about anything. You don’t need to involve your real estate, vehicles, bank account or any other assets.
Myth 2: Purchase Order Loans Affect Your Reputation
Some owners fear that using purchase orders to finance inventory purchases will earn them a negative reputation with their suppliers. That’s not true. In fact, this type of financing is common for large and small businesses alike. It’s simply a way of taking care of necessary purchases without having to tie up valuable working capital. That way you can use your liquid cash for other areas of business, such as payroll, taxes, rent, and marketing.
Myth 3: Trustworthy Lenders Don’t Offer Purchase Order Loans
Many different lenders offer purchase order financing. This includes large financial powerhouses and smaller alternative lenders as well. There’s nothing shady about this type of loan. The terms, interest rates and loan qualifications are not too different than other “traditional” loans; the main difference is that it’s the credit rating of your suppliers and customers that count as collateral, not your business’s credit score.
Myth 4: Purchase Order Loans Are Too Expensive
While this type of financing carries a higher interest rate than long-term loans, the costs are not very different than other types of short-term financing, such as invoice factoring or bridge loans. Interest rates vary by lender, but the whole purpose of this type of loan is to let you purchase inventory, make sales and still make a sizable profit.
Business owners have many different options available to obtain financing for day-to-day operations. Business lines of credit and SBA loans are helpful. However, they have somewhat strict credit score requirements. If your company needs capital, but you have less than perfect credit, a purchase order loan may be the right fit for you.
