Using PO Financing to Grow Your Startup
Many recent startup have found the current business environment and arrangements very suitable to growing their companies. By subcontracting manufacturing and selling to retailers rather than directly to consumers, a new business can save on the costs of building an extensive distribution infrastructure and instead focus on designing better products and marketing. However, sometimes this system has its challenges. What happens if your startup happens to get a purchase order too big for you to immediately pay for the manufacturing costs? This is where PO financing can be useful.
If a product proves popular enough, nationwide retailers may not hesitate to place a purchase order worth tens or hundreds of thousands of dollars. While this is a sign of success for a new company, an order of this magnitude may be difficult to fill. Subcontracted suppliers and manufacturers usually require payment before production when working with a new company, not working on credit. A startup just getting off the ground may not yet have the equity to get a large enough loan from a bank. Relying on venture capital or angel investors can be difficult, as they can be hard to find, and you may have to give up some of your equity.
The other solution to try is purchase order financing. There are some initial requirements that must be met for this kind of financing to be effective. PO financing only applies to companies providing products, not services, and works best with items that have high gross margins, so commodity-type products with margins under 20 or 30 percent may not be applicable. It also requires that the manufacturer your company subcontracts is established and reputable. But if your business can meet these qualifications, purchase order financing is a viable option.
With PO financing, rather than your startup paying your manufacturer to fulfill an order, a finance company covers the costs instead, using the order itself as collateral. Once the product is manufactured and shipped, the vendor inspects it and then pays the invoice, settling the transaction. This type of transactional funding means that the company itself doesn’t have to surrender any equity, while still posting substantial sales that build your business’s reputation. Such financing also scales well to any size of order, so can be very useful for a startup that sees an unexpected spike in the popularity of its products.
Large purchase orders are a two-edged sword, but by taking the right steps, they can benefit a startup. Any new business owner should look into PO financing to handle their big orders.