4 Benefits of Purchase Order Financing

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Companies often need to explore alternative funding options when they’re tight on cash flow. Borrowing money is essential to successful business operations, no matter what industry your company operates in. Whether you’re embarking on a new project or have a large order you need to fulfill, purchase order (PO) financing can be the right business financing solution. If you don’t have enough cash to run your company freely, it’s time to explore how purchase order financing works.

This article will help you discover the advantages of purchase order financing, such as the ones listed below.

  • Take on more business than your current cash flow allows
  • No long-term commitments like a loan
  • Low fees and costs, especially compared to other financing options
  • Easy to qualify for without putting your personal assets on the line

Continue reading to learn more about how your business can receive funding by using outstanding purchase orders.

What Is Purchase Order Financing?

For those who aren’t already familiar, purchase order financing is a short-term funding solution. It provides capital to pay supplier costs upfront on verified purchase orders, allowing companies to accept orders on goods and adjust the loan basis up or down to meet working capital needs.

Purchase order financing can be stopped at any time, including when order volume drops or the funding isn’t needed anymore. There is no long-term commitment to contend with, so companies can rely on purchase order financing for the cash they need, on-demand.

PO loans can finance an entire order of goods or just a portion, depending on the funder. When the supplier is ready to ship the order, the PO funding company collects payment directly from the customer. The funder then subtracts their fees and sends the balance of the invoice to your company so that you can receive compensation. Any business that relies on purchase orders can use this type of business financing, including established companies and even startups looking for short-term funding solutions.

Purchase Order Loans Process

Before diving into the various benefits of purchase order financing, let’s discuss the process for obtaining this type of business funding. Like any alternative funding, you will need certain documents to gain approval. From there, it’s crucial to know the costs associated with PO financing to make an informed decision.

Step-by-Step Process

To better understand purchase order financing, learning about the funding process is a great next step. Purchase order financing has many similarities to invoice financing, which offers an advance sum based on unpaid invoices. A few terms to note include:

  • Borrower/seller: This is you, the person who needs funding to fulfill a purchase order.
  • Purchase order financing company/lender: The lender or the company that’s providing the financing.
  • Supplier: The company that manufactures or distributes the goods.
  • Customer: Your customer, the party that’s trying to buy the goods and has given you a written purchase order for the goods.

Learn more about how the PO finance process works by reading below.

You Receive a Purchase Order

Your customer will submit a purchase order to you for the goods they want to purchase. Based on this order, you can determine if you’ll need financing to fulfill the order. If you do, then the financing purchase order process begins.

Your Supplier Estimates Your Costs

You can ask the supplier how much it will cost to get the number of goods the customer has requested. The supplier will send you an invoice with the cost. At this point, you will most likely confirm that you can’t afford to fulfill the order because you don’t have enough money on hand for the supplies.

You Apply for Purchase Order Financing

Once you know you can’t afford to buy the necessary supplies for your customer’s order, you can apply for PO financing. The PO financing company will approve you for up to 100% of supplier costs. The sum you receive will depend on qualification requirements, your customer’s credit history, and the supplier’s reputation. Most businesses will get approved for around 80-90% of their customer’s purchase orders.

Your Supplier Gets Paid

The PO financing company will then pay your supplier. You might have to make up for any shortfall by paying the supplier the difference owed. Now your supplier can do the work necessary to fulfill your customer’s purchase order.

Your Supplier Delivers the Goods to Your Customer

The supplier ships goods directly to the customer. You won’t act as a middleman since the purchase order financing agreement is in place.

You Invoice Your Customer

Once the goods have been delivered to the customer, you will be made aware. Next, it’s time to invoice the customer for the goods. If the customer wants to pay over time, the lender might purchase the invoice from you at a discount, which is considered invoice factoring. It will help you access your money faster and is another strategy often used to fulfill orders.

Your Customer Pays the Purchase Order Lender

When your customer pays, they won’t pay you. Instead, they’ll submit their money directly to the purchase order financing company. The faster your customer pays, the faster you’ll get your profits. Plus, you won’t have to handle any debt collections, as the lender will always take care of that.

The Purchase Order Financing Company Forwards Your Money

Once the PO financing company receives the customer payment, they subtract their fees and then forward the remaining sums. You will pay interest through these fees.

4 Benefits of Purchase Order Financing

The purchase order financing advantages are numerous, especially for those who can’t find the proper funding with a traditional financial institution. It’s crucial to secure financing so you can successfully operate your business, and cashing in on purchase order financing can be an excellent way to do that. Discover more reasons why PO financing and its open credit line can be an ideal funding solution for your business below.

1. Take on More Business

Many companies find themselves growing faster than the money is coming in. When this occurs, purchase order financing can be a massive advantage. If your cash flow is strapped and your business is in rapid growth mode, business needs and upfront costs might not be met. This is where purchase order financing comes in. Your company will be able to get the supplies it needs without disrupting operations or waiting for an increase in cash flow.

2. No Long-Term Commitment

Purchase order financing and business loans are not the same. Receiving funding using a purchase order results in cash for your business without a long-term commitment. Many business owners don’t want a long-term loan holding them back from financial freedom. So, they turn to purchase order financing to pay for 100% of their costs in one lump sum without worrying about paying the money back in installments. It’s flexible and transaction-focused, offering every business owner the opportunity to solve cash flow problems.

3. Low Fees and Costs

One of the best benefits of purchase order financing is that it’s one of the most low-cost funding solutions. Utilizing customer orders to unlock financing options is a cost-effective way to get the money your business needs. With the advance funds, you can receive the supplies you need and keep your company running smoothly. Plus, you can complete customer orders and continue profiting while using purchase order funding. Fees are low, making it an accessible option for all types of businesses.

4. Easy to Qualify

Are you having trouble securing business funding? PO financing is easy to qualify for, even if you have a short track record in business or need funding with a low credit score. Any business owner that struggles to get approved for a traditional loan can turn to PO financing. If you have outstanding purchase orders, then you’re a prime candidate for this type of funding. The requirements are much less restrictive, and your PO financing lender will be more interested in your customers’ payment history than yours.

Plus, with purchase order financing, you won’t have to sign a personal guarantee. Many loans require the business owner to sign a contract so that the lender can seize your assets to get the money back if the business can’t pay back the loan. Thankfully, PO financing is considered non-recourse. If the customer refuses the shipment of goods, doesn’t like the product, goes broke, or has another reason for not paying, the financing company loses their money. You won’t be responsible, which is a huge bonus because it means less risk for you.

Is Purchase Order Funding Right For You?

The ideal candidate for purchase order financing is any business with tight cash flow that needs to purchase materials before fulfilling orders. That’s all you need to be a great candidate for purchase order financing. Additionally, companies that are starting a new project or large order can use this flexible type of funding. Purchase order financing is right for:

  • Startup businesses with cash flow issues.
  • Companies that lack cash for new projects or large orders.
  • Businesses that cannot get approved for loans or business lines of credit.
  • Companies who want to avoid the long-term commitment of a loan or costs of a business loan.
  • Fast-growing businesses. 

Best Industries for Purchase Order Financing

Some businesses might not utilize purchase orders. In that case, they won’t be able to take advantage of purchase order funding. However, there are many different industries with businesses that rely heavily on purchase orders to operate successfully. Those industries include:

  • Manufacturing and distribution companies
  • Importers and exporters
  • Resellers
  • Wholesale B2B
  • Small business owners

Businesses in these fields are the best candidates for PO financing. Anytime they need working capital or a cash advance on a product order, they can rely on purchase order financing. Many different companies can rely on PO financing instead of a traditional bank loan, from manufacturing and distributing companies to resellers and distributors.

 

Qualify for PO Financing Today

The process to qualify for PO financing is fairly simple. The financing company will need several documents from you to make their decision. Before approving the purchase order financing agreement, they may look into your customer’s credit score or financial history.

Documents Needed to Gain Approval

To secure purchase order funding, you will need the following documents:

  • Purchase orders
  • Supplier information
  • Customer invoice information

Lenders might ask for additional information, depending on the situation. Unlike other types of alternative funding, PO loans don’t require a high credit score or other personal financial information, since it’s more about the supplier and customer.

Costs Associated With PO Financing

The costs of financing purchase orders will vary with each transaction. Usually, purchase order financing companies will charge 1-3% of the amount funded, while other lenders might charge a flat fee. The underwriting factors of funders that can impact costs include:

  • Paying upfront for goods
  • Delivery according to contract
  • Delivery time frame of goods to get paid

Get Started With Purchase Order Financing

Purchase order financing helps many businesses continue operating smoothly when cash flow dips. If traditional bank loans haven’t worked out for your company, consider this alternative type of financing to cover business expenses. A regular business loan can’t offer you the same flexibility as PO financing can.

If your customer has an excellent financial track record, lenders will quickly provide working capital in exchange for the purchase order. Solve supplier costs and make great profits with low purchase order financing fees. Much like invoice factoring, many businesses benefit from the funding opportunities provided by PO financing.

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