Many businesses turn a profit by the retailing and sale of stock, but in order to actually acquire such items, they will need to purchase it from a supplier. The problem here is that the business will not make a profit unless and until they actually sell the stock that they have purchased and so this can cause major problems with regards to the cash flow of the business. By virtue of the fact that the cash flow of the business happens to be unpredictable, this makes it all the more difficult for the business owner to effectively judge whether the business can afford to purchase items or not.
A common scenario that arises in the situation of stock driven businesses is that they sell stock to a customer who purchases the inventory on a line of credit (which means that they will pay for delivery sometime in the future). In this situation, the business will not actually have any cash in hand, but rather, nothing more than a promise of future payment, whenever that maybe. In the meantime, the supplier of the business may not be comfortable or willing to extend additional credit to the business, and so may not provide any further inventory because they have not received payment for it.
Unfortunately, as already identified earlier in the article, the problem is that the business has already tied up a sizeable portion of its working capital in the inventory that was purchased by the customer, who has not yet made payment for delivery. If the business was to pressurize the customer to hurry up with the payment of the money owed, there is always the risk that the customer feels aggrieved by this course of action and so may not wish to use the business in the near future.
It is for these reasons then that purchase order financing companies have quickly established themselves as a viable and competitive source of business financing as opposed to the likes of bank loans and overdrafts.
With purchase order financing companies, a retail business that deals directly with the sale of inventory will be able to acquire access to the inventory that they need in the timeframe that suits them, even if they do not have the money to pay for the stock upfront.
The manner in which purchase order financing companies operate is strikingly similar to the factoring agencies and so the purchase order financial business will provide the client company with a letter of credit, which the client company in turn will submit to the supplier.
The supplier will provide the client company with the stock that they require, at the very least, to the value included in the letter of credit. The client company will then assume responsibility for the sale of the stock acquired in this manner, and the purchase order financing companies will be paid as soon as the stock has been sold.