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The Benefits of Purchase Order Financing

August 19, 2022
Phil Cohen
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Sometimes it can be difficult to keep business moving when you are waiting on clients to pay their invoices so you can fund orders. Purchase order financing can be extremely beneficial to businesses in the industry who need to fulfill orders, but don’t have the working capital to do so.

Factor Finders understands how important working capital is to keep up with sales and orders. If your company has orders that are at a halt because of a lack of cash-on-hand, purchase order financing can be the funding solution you need. With the cash PO financing gives, new avenues are opened to allow your business to prosper.

What is Purchase Order Financing?

Let’s say you have a client who has a large order they want to place but you don’t have the financial means to cover the cost to do so. Purchase order financing also known as PO financing or purchase order factoring, is a funding solution for distribution businesses that lack working capital to get inventory to complete customer orders they receive.  Different from invoice factoring, the process of selling your invoices for work completed, with PO financing you can receive a cash advance for goods that have been ordered, but not yet delivered.

What Types of Businesses Can Benefit from Purchase Order Financing?

Purchase order financing is popular amongst manufacturing and distribution companies with credit-worthy clients who have large orders to fill. It’s especially beneficial to start-ups and companies who see seasonal peaks or unpredictable cash flow. The usual types of businesses who benefit from purchase order financing include: government contracts, wholesale distributors, industrial, manufacturing, importers, exporters, drop ship orders, and direct ship orders.

However, we do have a few guidelines for eligibility:

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

How Does Purchase Order Financing Work?

Once your company qualifies for purchase order funding, the actual process follows these steps:

  1. You will submit the purchase order to the P.O. funder your partnered with.
  2. The factor will directly pay the supplier for the purchase order.
  3. Once the supplier delivers the product, you will issue an invoice to the customer.
  4. You will 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, and then will advance the remaining invoice to you, minus the reserve.

What Are the Benefits of Purchase Order Financing?

Cash flow is the lifeline of any business. With purchase order financing, your business can cover upfront costs with your suppliers so that you aren’t forced to turn down profitable sales and other business opportunities caused by cash flow limitations. Purchase order financing enables companies to manger more orders, handle large orders and enhance customer and supplier relationships all while growing your business.

 Below we will highlight the key benefits of PO financing.

Opportunity to Take on Larger Orders with Purchase Order Financing

One of key benefits of P.O. financing is the ability it gives you to take on larger contracts. Larger orders require more money. Having to turn away new business opportunities simply because you can’t afford it can be detrimental to your company.  When you have working capital, it boosts your confidence to take on larger orders. With PO financing, you will be able to buy necessary supplies and cover additional expenses.

Purchase Order Financing is NOT a Loan

Purchase order financing is not a loan, it is an advancement on working capital you will acquire in the future. Unlike traditional bank loans, the qualification for P.O. financing is based on the credit-worthiness of your client. The customer pays the funding company, who then pays you, therefore clearing out the advance. This is very beneficial for start-up companies who may not have the long-standing traditional banks like to see. Because purchase order financing isn’t a loan, it leaves you debt-free.

Purchase Order Financing is Easy to Qualify for – Bad Credit Doesn’t Matter

When using PO financing, your credit or the credit of your business does not affect your ability to qualify. This means if you have bad credit, don’t sweat it. With purchase order financing, the finance company does however look at the credit-worthiness of your customer to determine your eligibility. This is because that is who the finance company receives payments from.

Purchase Order Financing Company Handles Collections

With purchase order financing, the finance company handles collections from your client. The PO financing company handles debt collections in a professional and productive manner. This allows your staff to focus on high value-added activities. After receiving the money from the client, it is sent to you minus a small fee.

Startups and New Business Are Eligible for Purchase Order Financing

When it comes to bank loans and other forms of financing, it can be very hard for startups to get any type of funding simply because they haven’t been in business long enough. Banks usually want to see a track record of success before they trust a company’s ability to pay back a loan. With PO financing, the finance company is more interested in if your company demonstrates growth protentional.

Success doesn’t happen overnight. The benefits of purchase order financing can be endless for a business like yours in need of cash flow.  PO financing 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.

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Stop Turning Lucrative Business Away and Turn to Factor Finders

Factor Finders has decades of experience with purchase order factoring. We’ve spent years cultivating relationships with factoring companies that specialize in PO financing and ready for your business to reap the benefits of PO financing. We work with each business 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 worldwide network. Start by giving us a call or filling out a free quote form today!

Read more:

What is Purchase Order Funding?

Extended Payment Terms During COVID-19

Purchase Order Funding During COVID-19

Purchase Order Funding Examples

About the Author

Phil is the owner of PRN Funding and sister company Factor Finders. He has been an authority in the factoring industry for over 20 years, serving on the board of directors for several factoring associations.

Learn more about Phil Cohen