Should I Use a Broker to Sell My Business?
This guide outlines the advantages of using a broker to sell your business and provides tips on finding the best broker for your needs.
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Purchase order financing, or P.O. financing as some may know it, is a no-interest, short-term finance arrangement in which a lender provides capital to businesses that need immediate working capital to fulfill single or multiple customer purchase orders, usually from large national retailers or government agencies.
As a small business owner, P.O. financing can be a lifesaver when it comes to fulfilling purchase orders that the business just doesn’t have the cash flow to fulfill otherwise. Without entering into a long-term loan solution, P.O. financing provides cash flow when it’s needed most.
Here’s a situation to demonstrate how P.O. financing can help a small business fulfill a large purchase order:
A small business that sells specialty pet food via their own online e-commerce website received a call from a large national retailer that wants to put their pet food in 25 retail locations in a test market. If the product sells through, the retailer would expand the coverage and pick up the product for all of its retail locations.  The situation is a home run for any small business, until the two business owners realize they’ll need to press their manufacturer to up production in order to fulfill the initial purchase order from the retailer.
In this situation, P.O. financing is the ideal solution for the small business owner. By entering into a P.O. financing arrangement, the manufacturing company that produces the pet food for the small business will be paid by the P.O. financing company. Once the pet food is shipped to the retailer and the retailer is invoiced for the pet food, the P.O. financing company will be paid by a factor who will take over the invoice from that point forward.
When considering a P.O. financing arrangement, the lender will check the credit of the borrower’s customer – not the small business producing the goods. If the end customer has a good track record of paying bills on time and has the finances to cover the goods it has ordered, it’s likely that a financing arrangement will be made.
This basic flow of purchase order fulfillment via P.O. financing is the same for any small business entering into a purchase order arrangement. It can be tricky to think of this type of financing in theoretical terms, but when you look at the numbers, it’s easier to see how small business benefits greatly from P.O. financing when the conditions are right.
In our situation with the pet food business, let’s say the retailer wants 50,000 cans of pet food at a retail cost of $5.00 and a wholesale cost of $2.50. The invoice for the total purchase order will therefore be $125,000 and is due NET 30. The cost to make each can of pet food is $1.25, so the small business needs to pay the manufacturer $62,500 sixty days in advance.
Here is where the P.O. financing company enters the picture. The purchase-order lender will pay the manufacturer of the pet food the $62,500, removing the immediate financial burden from the small business. Then, when the product is shipped and invoiced, a factor will pay the purchase-order lender the $62,500 plus interest and fees. At this point, the small business will also get 85% of the invoice minus the amount that is paid to the purchase-order lender. When the retailer pays the invoice 30 days after receiving the goods, the small business receives the balance of their payment (15%) minus the factor’s fees.
Many small business owners turn to purchase order financing in order to fulfill purchase orders because the option is less costly (and involves far less financial commitment) than entering into a long-term loan solution or bringing on an investor and giving up equity in the company.