Borrowers in need of a loan or alternative financing solution, may not necessarily understand all the ins and outs of the financing industry. You’re surely not a finance expert, and you’re not expected to be. We’ll leave the taxes, auditing, legal specialization, etc. to you and you can leave the financing details to us.
Our team at Innovative Capital Corporation aims to make the lending process as simple and streamlined as possible. We want to make sure that our clients understand what they’re working with. Our goal is to support your needs and suggest the best lending solution that you may not have considered otherwise.
In an effort to loop our clients in on some of the financing lingo you might hear and wonder “what does that even mean?” we’re sharing a comprehensive guide to purchase order and inventory financings. Keep reading to learn more.
Purchase Order Financing
What is purchase order financing? Simply put, purchase order financing is an option for businesses to support the payment or funding of their purchase orders such as to pay suppliers or even out their cash flows.
Purchase order financing may be a good option for businesses that need a quick funding option to pay their suppliers to keep operations running smoothly.
Consider a medical device company. They get multiple components from Asian and European manufacturers before assembling their product in the USA and selling to domestic and international clients. Purchase order financing would support this business in funding the acquisition of their supplies in order to begin manufacturing prior to being able to sell their product.
In this hypothetical scenario, purchase order financing is likely an ideal financing solution to alleviate their challenges. Especially when a company is growing rapidly. A strategic advantage a non-bank PO or non-bank ABL has over a bank is they are typically underwritten based on future cash flow rather than historical. This is especially important for start-ups or companies in a high growth period.
Inventory Financings
Inventory financing is relatively similar to purchase order financing. The main difference, however, is that inventory financing is utilized to purchase products that are not intended for immediate sale.
Inventory financing is most commonly utilized by small privately-owned businesses that often don’t have many other options. An alternative may be for a business to pursue a business line of credit but this may expose them to higher interest rates. Additionally, inventory financing is more often utilized as a shorter-term solution than a long-standing line of credit.
Consider a clothing business that is preparing for launch but has not yet gone live. While they are preparing their site or shop for launch, they want to ensure that they have adequate inventory on hand such that when they do open, their customers are able to purchase clothing immediately. As such, the business has to purchase significant inventory to have on hand prior to their launch and incoming revenue flow.
While these are both typically less commonly utilized funding solutions for commercial investors and real estate projects, they are often more relevant for use by small businesses and borrowers.
For more information on the variety of alternative funding solutions available to you as a borrower, check out more on our blog. If you’re in need of an immediate funding source for your upcoming venture, reach out to us today to get started.