Many times businesses ran into cash flow problems and are not able to fulfill client orders. While there are many ways to get financing to fulfill these obligations, they can do so using purchase order financing. Here, a financier will offer capital for the business to finance the orders. Here are six facts to know about purchase order financing.
1. Qualification of a Transaction
A purchase order transaction must meet the financier’s minimum requirements for it to qualify. The first requirement is that it needs to be a straight retail transaction. A straight retail transaction is a transaction that fails to involve the small business reprocessing or modifying the products sold. The business sells the goods as they are to the clients. Only minor changes, like labeling and packaging, are allowed. The purchase order must be non-cancelable and meet a minimum value of $20,000.
2. Qualification of the Supplying Firm
The company supplying the products must also meet these minimum requirements. The financiers will investigate if the firm can supply the goods in the proper quantity and quality. The supplier must also be in a capacity to supply the products after receiving the letter of credit. They must be free from liabilities that can prevent them from delivering the goods.
3. Qualification of the Business
A company is as good as those who own it. The majority of small firms can overcome challenges primarily because of the resilient nature of the owner. In case the business owner is incompetent or has some issues, the business might fail to fulfill the transaction. The owner of the business must be free from major liabilities and be up to par.
4. Money is Credited to the Account of the Supplier
One of the primary things that the owner of the business must know is that the financier credits funds directly to the account of the supplier or sends a letter of credit to them. This is as opposed to depositing the money to the account of the small company.
5. Check for High Rates of Interest
Mainstream financial organizations have strict requirements that a firm needs to meet prior to the project getting finance. This has resulted in the growth of smaller financial institutions that offer less stricter requirements. But business owners must be careful of high-interest rates and other hidden fees that make these options expensive.
6. Easy to Qualify
In case the firm meets a majority of the requirements set by the financier, qualification becomes an easy process. This is because this process is unlike that of a loan application, which is often stricter.
Purchase order financing will ensure that your big order is financed where you might not have been able to. Keep these facts in mind if you are looking to seek this financing option.