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Purchase Order Financing

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What is Purchase Order Financing?

Purchase order (PO) financing is a short-term funding solution that provides capital to pay supplier costs upfront for verified purchase orders. PO financing allows companies to accept orders on goods and adjust the loan basis up or down quickly to meet working capital needs.

If order volume drops, there’s no long-term commitment, so they can stop using it at any time. This funding solution protects cash reserves from declining because of cash flow problems related to work orders.

PO loans will finance an entire order of goods or a portion, depending on the purchase order funder. When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. The purchase order funder will subtract their fees and send the balance of the invoice to your company so that you receive payment.

Whether you’re a startup or an established small business, this product is available to small business owners who rely on purchase orders. Many clients receive PO funding on their first transaction as a new company. When you need a flexible option to offer your finished goods to the customer, we can help fund purchase orders.

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How Does Purchase Order Financing Work?

Consider this scenario: Your small business receives a large purchase order from a new or existing customer. The supplier of your company needs upfront payment for the supplies that are needed to start that customer’s purchase order, but the customer invoice won’t be paid for 60-90 days after shipment is received, and you do not have the liquid cash needed to cover the cost of supplies.

This creates a working capital issue that becomes a “catch 22.” Without the money, you risk losing the order and customer permanently. Many companies that seek financing from a traditional financial institution might not get approved, or the application process takes too long to solve the cash flow issue. That’s where PO financing works to help you access funds.

Purchase order funding can be one transaction or continuous, depending on the need. When funding a purchase order, payments are made directly to suppliers by the factoring company. Once you secure financing, your company can fulfill the order, with proceeds being distributed after shipment is received.

The Purchase Order Funding Process from Beginning to End

  1. You send the purchase orders and supplier’s estimate for the goods to the PO finance company.
  2. The purchase order finance company pays your supplier for the goods, and your order gets completed.
  3. The supplier delivers the products to fulfill the customer’s order.
  4. Your company then invoices the customer for the goods.
  5. The customer pays directly to the PO funding company.
  6. After deducting their fees and what the customer pays, the PO financing company sends you the remaining balance.

Terms: Immediate transaction 
Fees: Origination fees vary, typically 1.5% to 3% of purchase order
Credit Standards: PO finance companies are more interested in the creditworthiness of the customer than the borrower
Documentation: Purchase orders and information about supplier and customer

Most companies use PO financing to pay for the cost of goods upfront without using their own working capital. Purchase order loans help solve cash flow problems.

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

The cost of financing purchase orders varies for each transaction. Typically, PO financing companies charge 1% to 3% of the amount funded, while other PO financing lenders charge a flat fee. Funders’ underwriting factors that impact fees can include: paying upfront for goods, delivery according to contract, and delivery time frame of goods to get paid.

  • Manufacturing
  • Distributors
  • Import/Exporters
  • Resellers
  • Wholesale B2B industries

 

Any businesses with tight cash flow and a need to purchase materials before fulfilling orders make great candidates for purchase order financing.

  • Purchase orders
  • Supplier information
  • Customer invoice information

Frequently Asked Questions About Purchase Order Financing

  • Companies can take on more business than current cash flow allows.
  • Purchase order financing is not a long-term commitment like a loan.
  • Purchase order financing has low fees and costs.
  • Purchase order financing pays your suppliers directly on time.

PO financing is short for “purchase order financing,” a flexible option that you can use to access financing. PO financing companies offer working capital to pay suppliers upfront for purchase orders of goods. This type of loan product allows companies to accept their influx of orders and adjust their PO financing loan based upon order volume.

With no long-term commitment, PO financing is a great way for companies that rely on orders to finance purchase order operations with ease. PO financing offers a way to deal with customer orders without being tied down by loan products. You’re able to manage large customer orders easily with PO financing and manage your finished goods and inventory with ease.

Purchase order financing is not difficult to obtain, but PO funders have different criteria for approval. If you’re wondering whether or not you’re qualified for purchase order financing, make sure that you’re checking off all of the boxes.

  • The lender will consider if your company makes the goods it sells or just resells goods from the supplier.
  • The lender will consider the amount of the purchase order and the gross margin of profit on the transaction.
  • The purchase order transaction cannot have a cancellation clause.
  • The borrower needs to have a good reputation and be in good financial standing. Lenders conduct due diligence on the borrower’s business.
  • The customer involved needs to be creditworthy. Some PO funders will do a business credit check on your customers. Some might not do credit checks, but they will still look for a track record of timely payments, bankruptcies, or litigation related to the customer.
  • The supplier is reputable, with a track record of delivering orders on time, made to customer specifications.

Yes, you can qualify for purchase order financing if you have bad credit. PO lenders favor creditworthy customers more so than business owners. Some purchase order finance companies will do a business credit check on your customers.

The short answer is yes! Many purchase order financing companies will fund a startup’s first transaction if it meets normal qualification criteria. Simply check off all of the boxes, and your products will be good to go.

The Bottom Line

Advice, Tips, and Warnings About Purchase Order Financing

Purchase order financing is an excellent product to assist companies in accessing working capital for large projects and business growth. With purchase order financing, you can access the capital and not sacrifice cash flow. The costs are minimal compared to the benefits of this product, so a cost versus benefit analysis is a no-brainer. Your goods and orders deserve a solution that works.

When pursuing purchase order financing, the purchase order financing company is your partner in evaluating any risk in the transaction to avoid any problems or disruption in your overall operation. If the purchase order finance company says no to a certain transaction, it’s for a good reason. Remember, approvals are specific to each transaction, so sometimes, there will be approvals on some transactions, and others will be declined. It’s case by case.

We recommend purchase order financing if you meet the qualifications, as it is a great product to add to your financing toolbox. Just make sure that you have the right purchase order financing company by your side to help with the customer orders.

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Alternatives to Purchase Order Financing

While purchase order financing offers plenty of sound choices for borrowers, there are more options available. Alternative options to PO financing might be what you’re looking for, with a wide range of benefits that you can take advantage of today for working capital or other needs.

Invoice Financing

Invoice factoring works by providing a cash advance based on the total value of unpaid or outstanding invoices. You typically receive up to 90% of the invoice value upfront from a factoring company. The percentage of the amount of invoice factored is based on the risk profile of your clients. Once your client pays off the invoice, you receive the remaining value of the invoice minus a factoring fee. This fee can be structured in many ways, but it generally nets out to be about 1% to 2.5% of the invoice value. A factoring company may also operate with a flat fee system.

 

Product Overview

Rates: Factor rates starting at 1% to 2.5%
Fees: Monthly service fee depending on volume
Credit Standards: Customer credit is evaluated, not the business owner
Documentation: Application, accounts receivable aging report, invoices, and client information report

 

Benefits and Best Uses of Invoice Factoring

Invoice factoring is a great option to help businesses improve cash flow and get paid quicker on invoices for nominal fees.

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Business Credit Cards

Business credit cards are a revolving credit line, like a personal credit card. A card is issued that can be used for both purchases and payments. Business credit cards are part of the overall finance toolbox you have at your disposal and are used in conjunction with other loans. Business credit cards are the fastest way to access capital for the company.

 

Product Overview

Rates: Interest rates start at 0% up to 28.99%
Terms: Revolving line of credit with no term limits
Fees: $0 to $500 annual fees
Payments: Low flexible monthly payments
Credit Standards: Must have good to excellent credit and deep credit history
Turnaround Time: Instant to 24 hours

 

Benefits and Best Uses of Business Credit Cards 

Business credit cards are flexible and offer the ability to access money instantly. These can be used to cover supplies and raw materials as well as pay bills or invoices. This finance product is great to access capital in a pinch or emergency.

 

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Business Line of Credit

A business line of credit is a finance option that you can draw funds from on an as-needed basis, just like a credit card. A business line of credit is a solution that operates like a credit card in that you can draw money on demand up to a credit limit. With a line of credit, you only pay interest on the funds you actually draw. The costs are less than a credit card, but this finance product is harder to obtain and get approved for.

 

Product Overview

Rates: Rates starting at 6.50%
Terms: Revolving credit line that is renewed semi-annually or annually
Fees: Origination Fees 0% to 3%
Payments: Monthly, bi-weekly, or weekly payments
Credit Standards: All credit considered with good to excellent credit preferred
Special Features: Approval to funding can be same day up to three days
Documentation: Full Documentation. A one-page application and three months of bank statements, sometimes financials will be required depending on the credit limit.
Time Frame: Same day to up to five days

 

Benefits and Best Uses of Business Line of Credit 

Flexibility is the main reason businesses choose a business line of credit if they are qualified. The ability to draw money at any time up to a set limit is very popular with small business owners.

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Short Term Business Loans

When traditional financing is not an option, short-term loans can be a great alternative if you use the money properly. Short-term loans provide a fixed amount up front (lump sum) of money with a fixed payback amount calculated using a factor rate over a short fixed term, typically 6 to 18 months. Rates are not principal and interest but are based on a “factor cost” and cost more than traditional loans.

This funding option is popular because it requires very little paperwork, and credit requirements are much more forgiving than traditional loans. To mitigate risk, this product charges more for costs, has a shorter term, and the payments are more frequent.

 

Product Overview

Rates: Factor rates starting at 1.09% up to 1.45%
Terms: 6 to 18 months in duration (typically 12 months or less)
Fees: Origination fees 0% to 5%
Payments: Weekly, bi-weekly, and in some cases daily Monday-Friday
Credit Standards: All credit considered from poor to excellent
Special Features: Approval to funding can be the same day to 24 hours
Documentation: Low documentation with only a one-page application and three months bank statements required
Time Frame: Same day to 24-hour approval

 

Benefits and Best Uses of Short Term Business Loans 

When the bank says no, short-term lenders say yes! This product is a great alternative that can come in handy for businesses in need of fast working capital that were previously turned down by traditional financing. Reduced documentation is needed, and credit requirements are lower than that of a bank loan.

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Business Cash Advance

Business cash advances (BCAs) are also referred to as a “purchase of future sales agreement.” The advance payment provides a fixed sum of money upfront to a business with a fixed payback amount, known as a specified amount. The advance funds are repaid by taking a fixed percentage of future overall sales deposits. Payments are collected by an ACH and deducted from a business bank account. 

After every month, if the fixed payments taken are more than the set future percentage of sales, then a refund back to the merchant can occur. This repayment continues until the payback amount is paid back in full. Therefore, there is no term limit with advances as the fixed payback percentage never changes.

 

Product Overview

Rates: Factor rates starting at 1.09% up to 1.45%
Terms: No term limits (payoff depends on future sales)
Fees: Origination fees are typically 0% to 5%
Payments: Fixed ACH payments are weekly or daily Monday-Friday
Credit Standards: All credit considered, from poor to excellent
Documentation: Reduced documentation with only a one-page application and three months’ bank statements required
Time Frame: Same day to 24-hour approval

 

Benefits and Best Uses of BCAs

A BCA is an alternative when other financing options are not available to the business owner. A BCA provides working capital to a company when a bank loan is too strict.

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Merchant Cash Advance

A merchant cash advance (MCA) is a “purchase of future sales agreement,” which is the same as a BCA, but the key differences are found in the repayment. Repayment is attached to future credit card sales instead of overall daily sales. Funds are repaid by taking a set percentage of future credit card sales at a time until the advance is paid back in full.

 

Product Overview

Rates: Factor rates starting at 1.09% up to 1.45%
Terms: No term limits (payoff depends on future credit card sales)
Fees: Origination fees are typically 0% to 3%
Payments: Set percentage of future credit card sales at the batch time
Credit Standards: Poor to excellent credit accepted
Documentation: One-page application, three months’ processing statements, and three months’ bank statements are all that is required.
Time Frame: Same day to 24-hour approval

 

Benefits and Best Uses of MCAs

An MCA is an alternative to a BCA because it allows for low average balances in a business bank account and offers repayment through a fixed percentage of credit card sales instead of overall sales. Payments fluctuate down in slower sales times, creating no term limit. Documentation and credit requirements are less than traditional financing due to the repayment method. This is a great option for cash flow needs.

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Merchant Cash Advance

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