When you receive a large order, it can be difficult to get all the supplies necessary to fulfill it, especially if you are a new business. The cost of these raw materials can prevent you from fulfilling the order, at least in one shipment. However, purchase order financing allows you to gain financing based on the purchase order. These are some advantages and disadvantages of this financing option.

Disadvantages

There are several risks to this type of financing that you should be aware of. First, there is a cost. Although these companies don’t typically charge interest, you will have to pay a fee upfront. However, you can compare fees across companies and choose the best option for you. In addition, you may only receive a portion of the purchase order amount up front. This shares the risk between you and your financier.

In addition, when you finance your purchase orders, you no longer own them, so your financing company collects the total balance when you fulfill the order. This means that your customers will be in touch with the finance company, not you. This can strain your relationship with your customers, especially those concerned about their privacy. This process can also make your customers question your financial viability, which may reduce or prevent future orders.

Finally, you do not want to use this type of financing long-term. This is only a temporary solution. The goal should be to establish your cash flows in the amount necessary to fulfill your orders in the future.

Advantages

Purchase order financing is not a loan, so you don’t have to repay it. Instead, your financier will either collect the money from your customers or you can repay it when your customers pay you for their products. However, you do have quick access to the cash you need to fulfill the clients’ orders. You will likely know whether you are approved and receive your funding within 24 hours.

If your customers don’t pay their bills, you do not have to pursue collections. Instead, the finance company is responsible for collecting the full value of the purchase order from your clients. This reduces your risk of nonpayment significantly. You also don’t have long-term payments like you would if you had received a loan.

Before you decide about your purchase order financing options, weigh all the pros and cons. Make sure this is the right option for your company.