Term Business Loan

When Banks Say “No” Try Purchase Order Loans



In challenging economic times cash flow is king. Respecting this highly critical aspect of business, small and medium-sized organizations are required by market forces to maintain a healthy stream of cash flowing through their operations if they expect to survive and grow larger. This is so because small and medium-sized businesses commonly lack access to the commercial credit facilities that large corporations enjoy. Having the ability to tap into a pile of ready cash at the right moment may very well make the difference between securing a valuable contract and losing out.


Leveraging Future Cash Flows

Small business operators seeking alternative funding solutions have various routes they can take to solve the working capital problem. Many of these involve some means of leveraging an organization’s future cash flows. Accounts receivables factoring is such an example. With “advance” factoring, a business operator in need of cash sells his or her receivables (invoices) to a factoring company which advances the client a fair percentage of the client’s gross invoice totals before taking a fee upon collection of the invoices. Invoice discounting is a similar financing methodology that enhances an organization’s cash flow position by allowing it to draw money against a percentage of its sales invoices. Invoice discounting involves using sales invoices as collateral for short-term borrowings and differs from factoring in that the client performs collection on their invoices and pays the lender interest rather than a service fee. A third cash flow solution for small business involves credit card merchant account cash advances such as those offered by firms like Advance Funds Network of New York. A merchant account cash advance permits a retailer to borrow money against future credit card sales receipts.


Variations on Factoring

Purchase order finance is a form of short-term credit where the lender relies upon the credit history of its borrower’s customer rather than the borrower itself. A purchase order is a document confirming a buyer’s intent to take delivery and pay for certain goods or services. A purchase order is often sufficient to give a lender the confidence that its client has the wherewithal to repay a loan. When a business owner (client) receives a substantial order but doesn’t have the resources to manufacture the goods it needs to ship, a purchase order finance company (lender) will step in. In the purchase order finance process the lender investigates the credit history of its client’s customer rather than the credit history of the client. If the customer is deemed creditworthy, a good basis to extend credit to the client can be established.


Owing to this lending arrangement a small business can obtain the funds it needs to produce and deliver goods it would not otherwise have. When the goods are delivered and the final invoice is paid, the funds are remitted to the lender, which deducts its fees and interest and pays out the remaining monies to the client. Purchase order lenders typically grant credit on such terms where their clients earn at least a 30 percent margin on their sales. In this way, sufficient room for the client to make a profit exists.

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