Small enterprises are subject to market imbalances a lot more than the big ones. This is because the money involved in the business is a small amount. Due to this a small blockage in cash can act like a big block in the major artery of the business. Hence small companies need to tread the water a lot more cautiously. The cases of blockage of money can be saved by mortgaging, loaning or by a method called factoring. This is currently the most sought after method. This method is also called purchase order financing
Purchase order financing:
The definition of purchase order financing is to provide finance over an invoice or purchase order created. This is safer than the other conventional method of financial helps. This is because unlike in the other methods of mortgaging, you are not mortgaging any item, like in bank loans you are not taking a lump sum and then using for the business purposes. On the other hand you are loaning an amount equivalent to the item that you sold. This can be explained in much simpler version.
What does it really mean?
Let’s say you own the business of selling books. A customer purchases hundred books from you and pays you a token amount of half the actual price. This is a business transaction that should create a purchase order. This is a case where the customer did not pay you the complete amount. The customer is expected to pay you the amount in the near future most of the time the customer payment is delayed. The customer cannot be harassed and asked for the rest payment always. This can cause friction. The business is having a shortage of money, you don’t have the money in hand, and on the other hand someone actually owes you the money. This is a classic example. In the method of purchase order financing, you can take the invoice to a factoring firm and the factoring firm can pay you the money that the customer owes you. In this way you have the money needed in hand. Whenever the customer pays back the rest of the money, the factoring firm levies a small fee and pays you back the rest. In this method both the factoring firma and the business is safe. This is because you are not loaning the money that does not exist but money that actually belongs to you.