Purchase Order Financing

Since the 'Big Banks' have reduced lending to small businesses, they have turned to alternative means to raise funds. In addition to credit cards (credit lines reduced by the same Big Banks), pawnshops and 'payday' lenders, small business owners are discovering 'purchase order financing'. Similar to 'factoring' where a firm sells its invoice (at a discount) to raise quick cash, purchase order financing are guarantees, written by the buyer, that they are committed to purchase a product. Useful especially with off-shore manufacturing, the business owner would typically pay the factory to manufacture the goods, but in purchase order financing, the money firm instead pays to have the finished products shipped from the factory. Once the money firm is paid, they take their cut and gives the balance to the small business owner.

Why has this form of expensive financing gained popularity? The inability of small businesses to borrow from the lending institutions they use to reliably borrow from, prior to the current economic downturn.

Here's the latest report by the US Treasury that tracks this downturn in lending.

Here's a news story from the New York Times that lists this trend in more detail.