Does your company need to look into purchase order financing? Otherwise known as a factoring loan, small companies looking to grow can use this type of financing to expand their business, fill large orders or meet payroll. How can you tell if a factoring loan is right for your company?
Can Your Company Get A Loan From The Bank?
Small businesses have trouble getting bank loans for a variety of reasons. If your company doesn’t have an established track record, a bank may not be willing to take a risk on a business that could fail. Small businesses that aren’t profitable yet are also not going to be attractive to banks. For companies that have no credit history and inconsistent revenue each month, a purchase order loan may be the best option.
How Do You Get A Purchase Order Loan?
Purchase order loans use your accounts receivable as collateral. You fill the order, get paid by the factoring loan company and your customer then pays you. When you get paid, the money then goes back to the factoring loan company. The fee is generally 10-15 percent of the value of your order.
Why Would You Want A Factoring Loan?
Many of your customers will not pay as soon as the order is shipped. It is accepted practice that your company will receive payment 30 to 60 days after the order is received. This gives your customers financial flexibility and shows goodwill on your part. Unfortunately, your company still has to pay its bills until the money arrives. With a factoring loan, you have the money as soon as the order is shipped. This helps you cover the cost of filling orders that you may not have the means to fill without getting payment upfront.
Certain Revenue Minimums Must Be Met
Typically, only companies that make at least $10,000 a month are eligible for a purchase order loan. The good news is that you don’t have to have a steady income or necessarily be profitable when you apply for the loan. For borrowers with bad credit, a secured purchase order loan may be the only way to get needed working capital without paying an exorbitant interest rate.
There Is No Need To Put Personal Assets Up As Collateral
As your loan is secured with your accounts receivable, you don’t have to put up any additional collateral to get the loan. This means that you don’t have to risk personal assets such as your house or car. You also don’t have to put up business assets such as large machinery or anything else that you need to run your company effectively. Unlike a bridge loan, you don’t have to offer your land or any buildings that you own as collateral. Compared to your other options, a factoring loan is a safe option.
Purchase order financing is something that your small business should consider for many reasons. If you need money fast, using your accounts receivable as collateral can be a safe and effective way to access cash in a hurry.