Using PO Financing to Fund Startups
While there are many obstacles in starting a business, covering the initial expenses of getting your product to market can be one of the greatest challenges. There are many ways new businesses can get capital to pay for the costs of starting up, each with drawbacks and detriments. One option that has recently become popular for any company that produces a product is purchase order financing. By properly leveraging PO financing, you can build a revenue stream to get your business off the ground.
One trial that some successful startups must face is a large purchase order from a major vendor or retailer. Distributing through retailers tends to be easier than selling directly to customers, requiring less infrastructure and organization, and in the age of the internet working with retailers has become the standard model for many companies. If a product becomes popular enough, however, the vendor may place a big order. While this is a gratifying sign of success for a new company, these orders can be hard to fill, as most subcontracted manufacturers won’t work for credit, and getting a loan to bankroll an order costing a hundred thousand or more can be difficult.
This is where PO financing becomes useful. A finance company can cover the costs, using the large purchase order as collateral. They pay the supplier via cash, letter of credit or wire transfer for the production to fill the order. Once the product is manufactured, shipped and received, the customer, in this case the retailer, pays the invoice. With this payment, the transaction is settled.
To take advantage of purchase order financing, it’s necessary to be selling a product, not a service, and have an established, trustworthy company manufacturing your product. It also is only effective with products with reasonably high profit margins, generally more than 20 percent, which means commodity-type products tend not to work.
While it has its limits, PO financing is a great choice for the right startup companies. Its biggest plus is that it doesn’t require a new business to give up any equity. It also scales to any size of orders, better than most other financing systems, allowing a startup to grow and build a strong track record with customers, which can then be transferred to more standard types of financing.
A substantial purchase order can make or break a new company. If your startup is dedicated to producing quality products, PO financing may be your best choice for handling major purchase orders and firming up your customer base.