Not long ago, if you had a need for financing and your business finances were in good shape, it seemed banks would line up to get the funds in your hands. Those days are all but gone now. Small-business lending has declined sharply in recent months, with Bank of America, the largest US small-business lender, cutting their lending in this sector by 6.2 percent during the seven-month period ended in November. Overall, US banks reduced their lending during the same period by $12.5 billion.
What this means for some small business owners can be a scenario that would keep anyone up at night. Imagine having to turn down an order from Costco or Wal-Mart because you don’t have the funds to produce the products they’re requesting. Even if on a smaller scale, it is disturbing to say the least to turn away any business due to lack of working capital for production. The good news is that, for many businesses in this position, there is a solution. A growing sector of the financial industry is saying yes to small businesses where banks are saying no.
What is Purchase Order Financing?
Companies such as Hartsko Financial provide financing to companies that have a purchase order from a creditworthy customer. The PO financer is more concerned with the financial strength of your customer than they are with that of you or your company. They will request a Letter of Credit (LC) from your customer and issue an LC on your behalf to the producer of your products, whether domestic or international. In this way, your finances aren’t as much in play, because they are facilitating the transaction at both ends. Basically, if you can prove you’ll get paid, they will send a letter of credit to your supplier. When you complete the order, the customer pays them, and they send the proceeds to you, less a percentage for their efforts.
The Price Tag
PO financing doesn’t come cheap. At Hartsko and other established firms, like Dallas-based King Trade Capital, Expect to pay as much as 3.5 percent for the first 30 days, and 1.25 percent for every 10 days thereafter. The quick math points to an annualized percentage north of 40 percent, which is obviously significant. So be sure your ducks are in a row and the order process is short enough to be able to pay the PO financer back quickly. If it’s going to take more than 60-90 days, this might not be the solution for you, and you want to try a peer-to-peer lending option.
While pricey, this sector of the financial industry has grown significantly over the past year, largely because, for many small businesses, it’s the only solution that will allow them to fulfill large orders, expand into new markets, or start up in the first place. If you think it’s a good solution for you, do your research, solicit feedback from others who have tried it, and let us know how it goes.