Many small-to medium-sized businesses rely on financing to stay afloat, as these firms often don't have strong enough cash flow or an adequate amount of available capital to fund everything on their own dime.
In some cases, owners of theses businesses turn to traditional financial institutions such as banks for loans, but this option isn't always available. For the same reasons that small businesses are unable to cover operating costs or purchase inventory without help – i.e. limited available capital, lagging cash flow – banks tend to turn companies of this size down for financing. A poor credit score could also play a role in that decision.
Without the ability to obtain some sort of financing, small- to medium-sized businesses could struggle to keep their doors open. However, banks aren't the only available option, which is why small business owners shouldn't be discouraged if one of these financial institutions declines their loan application. In fact, there are two very beneficial alternative financing methods available to companies that have been told "No" by a bank – inventory financing and purchase order financing.
Option No. 1 – Inventory financing: Retailers and wholesalers that run into the need for additional product can rely on inventory financing. This form of asset-based lending enables a firm to use current inventory as collateral to obtain a revolving line of credit, which, in turn, can be utilized to purchase product so shelves and warehouses remain full.
Small- and medium-sized retailers and wholesalers can also rely on this type of financing to help get through seasonal lulls. During times of the year where cash flow is lagging due to low sales levels, it can be difficult to remain open, but the revolving line of credit obtained through inventory financing can be used to cover operating costs when sales traffic is slow.
Option No. 2 – Purchase order financing: Small- and medium-sized manufacturers and wholesalers rely on the ability to fill orders to make money. Big orders from larger retailers provide great opportunities for growth for these companies, but without financing it can be difficult to fill them. That said, purchase order financing can be utilized, as it enables a business to receive up to 100 percent of the funds needed to fill an order.
One of the major benefits of this type of lending agreement is that it allows owners of manufacturers or wholesalers to avoid selling equity to come up with the funds to fill an order. It also allows them to take advantage of game-changing orders without tying up too much available capital.