How Purchase Order Financing Can Help Your Business Grow - By: Chris Harmen

Purchase order financing, also known as trade financing, is an excellent way to keep working capital available and suppliers satisfied by financing up to 100% of the manufacturers cost of pre-sold products. Instead of emptying the cash account to pay suppliers, you can use outside purchase order funding to create a line of credit from which manufacturers can draw payment on shipped goods. This frees working capital to be better spent on increased advertising and sales efforts, while improving vendor relations.

Good business sense requires planning ahead for normal operations as well as the foresight to recognize that opportunities can arise unexpectedly. Without the available working capital on hand to take advantage of these opportunities, a firm will miss out and the competition will fill the gap and perform where you were unable to do so. Establishing a working relationship with a purchase order funding firm is an excellent way to retain the working capital a company needs to grow and expand.

How Does Purchase Order Funding Work?

Purchase order financing follows these basic steps to payment to suppliers while allowing your firm to retain working capital while awaiting payment from your client. First, you secure a purchase order for your products from a qualifying company. Once the purchase agreement is completed, a financing company provides a line of credit (LOC) in the form of an inventory loan, from which the manufacturer can then withdraw funds as payment for the shipped merchandise. This keeps suppliers happy and more likely to offer better discounts and deals in the future.

The Price of Success

Some managers may feel unsure about the fees associated with the establishment of this form of financing. While these fees do reduce the firm's initial profits, the long-term growth that occurs as a direct result more than makes up for the initial cost. This is a tool that allows smaller companies to take on larger sales than they might be able to do otherwise, such as in the case of seasonal activities or short term pricing advantages. Having the ready capital in hand opens the doors to many other opportunities that might otherwise have gone unnoticed or unattainable. The further benefit is that the company is not diluted by the loss of shares to investors, and eventually the growth will allow the company to reduce and stop the purchase order funding altogether.

Benefits of Growth Capability

Your storage and distribution facilities may be excellent and ready to move forward, but without the working capital to maintain the flow of goods, sales will be negligible. Purchase order funding boosts a company's ability to handle the maximum number of large-scale sales possible, all without depleting working capital. By retaining these funds, companies are better prepared to take action toward increasing sales without incurring debt. By increasing sales, the benefits of branding and customer loyalty begin to snowball, growing greater each fiscal period. Eventually, new channels of distribution will open up, creating even greater opportunities for your firm.

Rather than staying within the confines of your firm's ability to pay suppliers and then waiting for final payments from clients (potentially missing out on other sales opportunities in the meantime) purchase order financing allows you to continue to forge ahead without missing a beat, or losing any equity to investors.

About the Author

Chris Harmen writes about commercial finance topics such as purchase order funding and financing. Purchase order financing is a way to keep working capital and equity by paying suppliers with a line of credit from which they can draw payment.

Article Directory Source: http://www.articlerich.com/profile/Chris-Harmen/89665

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