A Complete Guide to Purchase Order Financing

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Running a business can be challenging especially if you find yourself facing cash flow problems. There are times where you find yourself needing cash on hand to cover the cost of doing business. Purchase order financing is a funding solution for companies in need of working capital to fulfill large orders instead of taking out a bank loan. If you’re a startup or small to mid-size business, purchase order financing can be It’s time to stop missing out of business growth and cash flow improvement.

A Guide to Purchase Order Financing

In this guide, we will explore the ins and outs of purchase order financing, and if it’s the right funding path for your company. Check it out:

Fulfilling Purchase Orders

Let’s start off by defining purchase orders and a common issue with them. A purchase order is an official document sent from a buyer to a supplier that indicates the sale of goods. The issue comes in when the supplier doesn’t have the liquid cash needed to actually fulfill the customer’s order. This is where purchase order financing comes in.

What is Purchase Order Financing?

Purchase order financing also known as P.O. financing is a funding option for businesses in the wholesale or distribution industry who lack the funds to fill orders they receive. PO financing is NOT a loan. With purchase order financing, the financing company issues a cash advance for goods that have been ordered, but not yet delivered.  This allows your company to create goods without having to wait for other clients to pay their bills so you have the working capital to proceed.

The funding obtained can be used to cover supplies and other costs associated with manufacturing, shipping, etc. Basically, PO financing will give you the money you need to make more money. No business owner wants to turn away orders because it’s a chance to make money and build a business relationship. In fact, that could be a bad reflection on the business itself. By having adequate cash-on-hand, your company will be more than capable of accepting new customers and taking on larger orders.

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How Does Purchase Order Financing Work?

Scenario:

Let’s say a customer places a large order with your company. After further review, you conclude you don’t have enough money for the raw material and supplies to fulfill the order. You can either turn down the order which can be a bad reflection on your business or you can seek other options for revenue.  Once you explore your lending options, you come to the decision that PO funding is the best option for you.

PO Financing: The Key Players

  1. The borrower: You.
  2. The factor: The funding partner we match you with that specializes in purchase order financing.
  3. The customer: Your customer who placed the purchase order with you.
  4. The supplier: The party responsible for distributing/ manufacturing the goods.

Once you’ve be approved for PO financing, the process goes like this:

  1. You submit the purchase order to the P.O. funder you’re partnered with through Factor Finders.
  2. The factor pays the supplier directly for the purchase order.
  3. Once the supplier delivers the product, you issue an invoice to the customer.
  4. You then sell that invoice to the factoring company in order to be advanced the money through accounts receivable factoring process.
  5. The invoice factoring company will pay the P.O. funder, plus fees, then advance the remaining invoice to you, minus the reserve.

Industries Best Fit for PO Financing:

There are a number of scenarios where PO financing serves as a funding solution. Factor Finders has been active in helping multiple industries finance their purchase orders, including government contracts, wholesale distributors, industrial, manufacturing, importers, exporters, drop-ship orders, and direct ship orders.

Who Benefits from PO Financing?

Purchase order financing is beneficial for companies who find themselves needing cash for:

  • Unpredictable cash flow
  • Seasonal sales spikes
  • Growing business

What Are the Qualifications?

The qualifications for PO financing include:

  • Sell to B2B or B2G businesses
  • Minimum gross profit for transactions must be at least 20%
  • Having worked with and conducted similar business with comparable clients
  • The first transaction of no less than $100,000
  • You must provide qualified purchase orders or letters of credit

The Pros:

When you find yourself turning down customers because you’re strapped for cash, PO financing can provide the working capital you need. With that said, PO financing can be very adventitious.

  • Qualification is easy.

Qualifying for PO financing is much less difficult that a traditional bank loan, even if you’ve been turned down in the past.

  • Bad personal or business credit? No problem.

Your factoring company is only concerned with the credit of the company ultimately paying the bill for the purchase order, not your credit.

  • Startups are eligible.

Startups face many difficulties when it comes to traditional lending since they don’t necessarily have longevity finance companies like to see. If your business is growing so quickly that you can’t keep up, PO financing will allow you to have steady cash flow so that you are able to handle new and incoming orders.

  • PO financing is NOT a loan.

It simply advances the cash that you would have eventually received from your invoice. This allows your company to create goods without having to wait for other clients to pay their bills so you have the working capital to proceed.

The Cons:

As with any lending option, there are disadvantages that come along.

  • Can be expensive.

PO funding isn’t the most expensive funding route but it does come with fees. Based on that factoring company, fees for PO funding can vary.

  • Not every business qualifies.

PO financing is designed to cover the cost of business that produce physical goods. If you are a business that provides services and not goods, you will not qualify for PO financing. Instead, try invoice factoring.

  • Based on the credit history of the customer who placed the order.

This can be seen as both a pro and a con as mentioned above. If your client has a poor credit history, qualifying for PO funding may be harder.

How much does it cost?

The cost of PO financing differs based on the financing company. It’s not a loan so doesn’t come with interest rates like a typical bank loan. Instead, fees are charged.

For an instant quote, fill out a form or give us a call now.  

PO Financing vs Invoice Factoring

Both PO financing and invoice factoring are used when the borrower is in need of liquid cash to combat cash flow issues. While these two financing options are very similar, they have key differences. Invoice factoring, also known as accounts receivable factoring, is the process of selling unpaid invoices to a factoring company on goods or services completed. On the other hand, with purchase order financing, the factoring company issues a cash advance for goods that have been ordered, but not yet delivered.

Find a Purchase Order Financing Company and Grow Your Business

Let us do the work for you. When it comes to purchase order finance and factoring, Factor Finders has decades of experience. We’ve spent years cultivating relationships with factoring companies that specialize in PO financing and ready for your business to reap the benefits of this alternative funding solution offers.

We’ll start by getting to know the needs of your business, as well as what you’re looking for before matching you with a reputable financing company within our nationwide business network. Get started by giving us a call or filling out a free quote form today!

Read more:

What is Purchase Order Funding?

The Benefits of Purchase Order Financing

Extended Payment Terms During COVID-19

Purchase Order Funding During COVID-19

Purchase Order Funding Examples