When To Use Purchase Order Financing
There are a lot of choices when it comes to using your business assets for financing. One of the less well-known and more useful options is purchase order financing. It has a limited scope since you must have a business that uses purchase orders to track jobs for trade or manufacturing. That being said, there are things you can do when you finance purchase orders that you simply cannot accomplish with other forms of financing, even flexible options like accounts receivable financing.
That is because financing a purchase order means getting a cash advance against work that has yet to be done, rather than one against work that has been completed and is awaiting payment. This is an important distinction because financing a purchase order for a large, short-notice job can provide you with the budget you need to order the supplies and pay the workers. That means you do not need to interrupt your regular cash flow management routine to take the job on, even if you are otherwise busy and need to bring in additional labor.
Purchase order advances can also be used as a regular cash flow management tool if you finance all of your purchase orders on a regular basis. The key is to remember that most financing companies only want orders before the work has started. If you are going to do the work before asking for an advance, you want to use invoice financing instead. Still, with a weekly purchase order financing submission, you can send for an advance on every order.
What is far more common is to use this form of financing selectively, financing just those orders that are big enough to be potentially disruptive to your other cash management plans. This allows you to use purchase order advances to manage cash flow without removing the option to finance invoices on smaller completed orders when you really need additional capital.
By smoothing over the large orders and using regular income management processes for the expenses related to smaller ones, you can easily set yourself up for a steady increase in your cash reserves. That makes it easy to project your next growth move, whether labor, square footage, or machinery. Keep that in mind as you weigh your options because you will be surprised how often the most cost-effective answer turns out to be purchase order financing.