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Purchase Order Financing: A Complete Guide

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 companies in need of working capital to fulfill large orders can utilize instead of taking out a bank loan. If you’re a startup or small to mid-size business, purchase order financing might be right for you. It’s time to stop missing out on business growth and start your cash flow improvement.

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A Guide to Purchase Order Financing

This guide 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 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 problem arises when the supplier doesn’t have the liquid cash needed to fulfill the customer’s order. This is where purchase order financing comes in.

What is Purchase Order Financing?

Purchase order financing, also known as PO financing, is a funding option for wholesale or distribution businesses that 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 waiting for other clients to pay their bills so you have the working capital to proceed.

The funding obtained can cover supplies and other costs associated with manufacturing, shipping, etc. Essentially, PO financing gives 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, turning down work often reflects poorly on a business. By having adequate cash on hand, your company will be more than capable of accepting new customers and taking on larger orders.

How Does Purchase Order Financing Work?

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Let’s say a customer places a large order with your company. After further review, you conclude you don’t have enough money to fulfill the raw materials and supplies demand. You can either turn down the order, which can negatively reflect your business, or seek other revenue options. Once you explore your lending options, you decide 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.

After approval, the PO financing 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 to advance the money through the 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 actively helps 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:

PO financing provides the working capital you need when you are strapped for cash and facing the prospect of turning down customers. With that said, PO financing can be very advantageous.

  • Qualification is easy.

Even if you have been turned down in the past, qualifying for PO financing is significantly less difficult than a traditional bank loan.

  • 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 regarding traditional lending since they don’t necessarily have the longevity finance companies like to see. For example, suppose your business is growing so quickly that you can’t keep up. In that case, PO financing will allow you to have steady cash flow so that you can 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 waiting for other clients to pay their bills so you have the working capital to proceed.

The Cons:

As with any lending option, some disadvantages will come along.

  • It can be expensive.

PO funding isn’t the most expensive funding route but it does come with fees. Fees for PO funding vary based on the factoring company.

  • Not every business qualifies.

PO financing covers the cost of businesses 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.

As mentioned above, this can serve as both a pro and a con. If your client has a poor credit history, qualifying for PO funding may be more challenging.

How much does it cost?

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

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 come into play when the borrower needs 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 are ready for your business to reap the benefits 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!

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