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This Is How Purchase-Order Financing Can Unlock Your Small Business's Potential Purchase-order financing allows small businesses to finance the production or acquisition of goods with no money out of pocket.

By Avi Levine Edited by Amanda Breen

Opinions expressed by Entrepreneur contributors are their own.

Purchase-order financing provides access to funding for undercapitalized, small-to-medium-sized businesses that have high-growth opportunities. This type of financing allows these companies to fill orders that they otherwise wouldn't be able to handle.

In the world of manufacturing and distribution, cash flow is king. Without cash on hand to fund purchase orders and fulfill contracts, growth is often stifled and customer relationships can be jeopardized.

Small-to-medium-sized companies looking to scale their businesses need capital to make those gains possible. Purchase-order financing is a way for companies to grow their businesses and fill large orders that they likely wouldn't be able to afford on their own.

When we started purchase-order financing at Star Funding, Inc., more than 20 years ago, we viewed that manner of business as an interesting and dynamic means of helping small businesses realize their dreams. Now, more than two decades later, we've been able to help several dozens of companies scale their businesses and reach dreams they never thought possible.

Related: You Can't Get VC Funding for Your Startup. Now, What?

Here are some answers to the questions that companies most often have about purchase-order financing.

What is purchase-order financing?

Purchase-order financing is when the production of goods for resale that are pre-sold to end customers is financed by a third party, such as Star Funding, Inc. Once a client gets a purchase order from a credit-worthy customer, he or she is able to purchase the inventory and materials needed to fill the order through financing.

Rather than working with a bank that will focus on assets, cashflow or past finances before authorizing financing, purchase-order finance companies will analyze specific opportunities and orders already in place.

By doing this, purchase-order finance companies attempt to unlock new forms of leverage for entrepreneurs. For these rapidly growing businesses, it's all about growth capital. This alternative option could allow a company doing $1 million in sales to potentially grow the business to $10 to $15 million in sales via the proper purchase-order financing plan.

What businesses are best suited to utilize purchase-order financing?

Purchase-order financing is for any company that is selling a product to another business. It's not a direct consumer sale.

That could be a company that is buying bikes out of China and selling them to Walmart or a company purchasing raw materials to produce a product domestically. Purchase-order financing can help provide cashflow for the purchase of the materials that will be used to make products to be sold.

What are the first steps that a business needs to take in order to secure purchase-order financing?

First, a business must secure a purchase order or be close to securing one from a customer. That business then needs to make sure it has access to acquire the products that it's reselling or producing in a timely manner.

A company offering purchase-order financing will then examine the buying and selling sides of the transaction to make sure that the deal is a sound and profitable one. In most instances, purchase-order financing can be secured within days, propelling a business toward the growth that it has only previously dreamed of accomplishing.

Related: How to Choose the Best Small-Business Loan for Your Needs

Why should we use purchase-order financing instead of securing financing through a bank?

In most instances, companies using purchase-order financing can cover entire transactions without a client having to put any money down out of his or her own pocket.

Also, here's another important reason to consider purchase-order financing: Small-to-medium-sized businesses can get financing help without having to sell equity in their company. Being forced to sell to investors often dilutes a company's power structure and threatens a loss of control.

What advice do you have for small-to-medium-sized companies in this post-Covid business world?

In today's world, success and sustainability are all about planning properly. Not just having a general idea of what you want to accomplish as a business, but having a monthly plan, a six-month plan and an annual plan — all with contingencies built in.

These days, logistics is one of the biggest concerns. Shipping has been troubled with all of the delays for various reasons. There's a lot of planning that needs to be done on that end, and you must build in contingencies for when something goes wrong. A big part of that is making sure that you have the proper financial support to fall back on in the event that you need it.

A lot of our clients will say to us, "I was able to scrape together the funds needed to fill this P.O." But then, they call us 10 days later and say, "Well, something else came up and now I have to scramble for Plan B."

If they were planning ahead of time, they would already be set up with a purchase-order financing company. Then, there would be a structure in place so cancelled orders and cashflow shortages could be avoided.

Purchase-order funding, still a relatively new option for businesses looking for creative ways to increase their finances, can ultimately help clients reach their growth goals. Best of all, it's a safe way for companies to scale their businesses without having to put down money or by diluting their equity stakes for short-term loans.

Related: This Convenient App Makes Financing Your Business Easy

Avi Levine

VP Star Funding, Inc.

Avi Levine specializes in working capital and growth funding for new and existing businesses. With a background in manufacturing and consumer products, he takes a forward-looking approach to financing his clients with less of a focus on past financial performance or a balance sheet.

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