If you’re an apparel business, then you know that securing the necessary capital to keep your business running can be a challenge. This is especially true if you need to place large orders with suppliers. Purchase order financing can help solve this problem by providing the money you need to cover the cost of those orders.
In this guide, we will discuss how purchase order financing works and some of the advantages and disadvantages of using it for apparel businesses.
Purchase Order Financing: The Basics
So, what is purchase order financing? Put simply, it is a type of loan that is used to finance the purchase of goods from suppliers. The loan is based on the value of the purchase order, and it is typically repaid once the goods have been delivered and invoiced. This type of financing can be very helpful for businesses that need to place large orders, but don’t have the cash on hand to do so.
Advantages of Purchase Order Financing for Apparel Businesses
There are several advantages that purchase order financing can offer apparel businesses.
Take on Larger Orders
One of the biggest advantages of purchase order financing is that it can help businesses take on larger orders. This is because the loan is based on the value of the purchase order, so you can borrow enough money to cover the cost of those orders. This can be particularly beneficial when it comes to expanding your businesses.
Doesn’t Increase Bank Debt
Another advantage of purchase order financing is that it doesn’t increase your business’s bank debt. This is because the loan is not based on your business’s credit history or assets. In this way, purchase order financing helps you to avoid some of the fees and restritions that are associated with traditional loans.
Eligibility is Easy
Another advantage of purchase order financing is that eligibility is easy to determine. Unlike traditional loans, which can be difficult to qualify for, purchase order financing is typically based on the value of the purchase order. This means that as long as you have a purchase order from a credit worthy customer, you should be able to qualify for this type of financing.
Disadvantages of Purchase Order Financing for Apparel Businesses
There are also some disadvantages that purchase order financing can have for apparel businesses.
It Can Be Expensive
First, it is important to note that this type of financing can be expensive. The interest rates on these loans are typically higher than traditional business loans. This is due to this type of loan generally being considered a higher level of risk.Therefore, it is important to make sure that your margins cover the fees so you can repay the loan.
Late Fees & Penalties May Be Applied
Additionally, if you are not able to repay the loan in a timely manner, you may be subject to late fees and penalties. This is standard for all types of financing. So it is important that you carefully consider whether or not you will be able to repay the loan in a timely manner.
As you can see, there are both advantages and disadvantages of purchase order financing for apparel businesses. It is important to weigh all of these factors before deciding if this type of financing is right for your business.