Why would a fledgling company prefer to go with an alternative financing route like a purchase order loan instead of sticking with the more conventional bank loans? This can be a very smart move for some startups in more ways than one may think.
For starters, PO financing is great because it is designed to operate off of the power of the startup’s suppliers and clients, instead of working off the strength of the startup itself. As a startup, the company should be focused on building their credit and establishing a solid financial foundation. Bank loans want to lend to those companies that have already attained a good standing with their credit. But building credit can be challenging, and it definitely takes a long time. PO Financing offers a way in for startups that have not yet had a chance to gain good credit.
Another reason that startups may prefer purchase order loans to conventional bank loans is that PO loans generally take less time to process. Banks may be willing to loan to a startup, but it may take weeks to get an affirmative response, if they even do decide to loan to a new company. But if the startup has just received a big order that needs to be fulfilled, usually they don’t have the time to wait for the bank to make a decision. The client’s order will need to be filled much sooner than the bank will allow, and the startup can’t afford risking lost time if the bank were to deny the loan. With PO Financing, the lenders typically just need to look at the order itself and look into the reliability of the startup’s supplier. Then, the startup preps their account to receive funding, and just like that, the new company is able to finance their client’s order.
Finally, choosing to go with PO financing allows the startup to maintain their equity instead of jeopardizing it at such a crucial state in the new company’s development. Because of how purchase order loans are set up, when the client pays the startup for their goods, the transaction is complete. The loan is satisfied without ever having to dip into the new company’s assets. It should be noted that startups will not benefit from this kind of financing if the profit margin on their order is not 25-30% or higher, but for those companies and orders to which this applies, a purchase order loan can be a great alternative to a bank loan.