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Purchase order financing

finances19158945.jpgBusiness credit for start up companies is hard to come by.Traditional lenders are still unwilling and even unable to invest in new business initiatives. Because of this purchase order financing has become a common source of capital in our down economy.

Purchase order financing is an excellent method for obtaining quick business capital.It is a solution that can be used when cash flow is low.Many suppliers want payment upfront for products, but your customers have a net 30 or 60 day term on their purchases.

Purchase order financing approves funds based on solid orders you have received for your products.If you can prove you'll get paid for the order, many reliable suppliers will work with you to provide your customers the products you need. The lender will look at your cash flow, business credit, invoices, and sales. They need to see that you have a sustainable product and that you generate enough income to repay the financing.

Typically purchase order financing is done through a professional third party.Funds are transferred from the third party to the supplier on the firm commitment to buy goods. A financing company will pay the manufacturer to produce and ship the goods ordered, once payment is collected from the committed buyers the financing company will be reimbursed for it's funding and be paid a fee for its services.This fee can cost you about 5% of your gross sales depending upon the amount of financing you need.

There are very few companies who specialize in this type of funding and although Wells Fargo bank has it's own dedicated purchase order financing unit, most banks will only deal with this type of financing with existing clientele and even then, very rarely. Wachovia also provides this service to customers that need it. Contact your local bank or lenders you have dealt with in the past to see if they offer purchase order financing.

Even if your company has seen its credit rating dip over recent years, purchase order lenders may still be willing to work with you.The lender bases their decision on the credit of your customers, rather than on your own credit.After all, it is the customers proven track record that makes suppliers believe that their commitment to purchase is worth the risk of sending the product off without payment.

This is how a typical purchase order finance deal would work:

  1. Your company receives a large order from an established, credit-reliable customer.This product is sold through your company as a distributer rather than as you being the manufacturer.
  2. Your purchase order lender sets up credit or a bank draft to pay the manufacturer for your goods.
  3. Your lender forwards payment to the manufacturer on your behalf and pays to ship the merchandise.
  4. The goods are shipped directly from the manufacturer to the customer
  5. Your company invoices the customer and the lender collects the money, takes payment along with additional fees and gives your company the remaining profits.

Purchase order financing provides you with more working capital so you can keep your business running successfully. It's easy to obtain and it's a great way to strengthen your business if you are in need of extra cash. Work with multiple banks to find one that offers the best rates on the financing along with flexible repayment terms. You can find a good deal after you check with about 3-5 different lenders to discuss the needs of your small business. Always compare rates and haggle with the lenders so you can find the best deal out there for your company. Purchase order financing is a great opportunity for small business owners and you need to take advantage of it.

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