Most small businesses are fully aware of the traditional forms of financing that are available through banks, but the same can't be said for alternative forms of funding, such as inventory financing and purchase order financing.
At first, owners of smaller companies might turn to a bank when in need of a loan. However, there is a chance they will be turned down for any number of reasons, including limited available capital, slow cash flow or a poor credit score.
When told "No" by a bank, alternative financing can be beneficial, but what is it exactly?
What is inventory financing?
When a small- or medium-sized retailer or wholesaler is in need of financing, it can use its current inventory to obtain a revolving line of credit through this form of alternative financing.
One of the major benefits of inventory financing is that it allows retailers to keep shelves full. Just because sales pick up at a small business, doesn't always mean it can afford to replenish inventory on its own dime. But, using the revolving line of credit obtained through this type of asset-based lending, retailers are able to keep shelves stocked without tying up any capital.
Additionally, inventory financing can help small businesses stay afloat during periods where cash flow is lagging. When sales levels are low, operating costs generally don't follow suit, which is why some small businesses can struggle to stay open. However, using the revolving line of credit, retailers and wholesalers are able to cover operating costs and avoid a situation where the doors are forced to close for good.
What is purchase order financing?
Both manufacturers and wholesalers can take advantage of this form of alternative financing. These two types of businesses rely on being able to fill orders to make money, and if they can't do that then they might be forced to close. Purchase order financing enables small- and medium-sized manufacturers and wholesalers to obtain up to 100 percent of the funds needed to fill an order.
Perhaps the biggest benefit of this type of lending is that it enables businesses of all sizes to take advantage of orders from big companies, such as Target and Walmart. Oftentimes, an order from a big-box retailer can bring a manufacturer or wholesaler to a new level, and purchase order financing allows them to take advantage of these opportunities.