Purchase Order Financing
Use your purchase orders to unlock capital!
How much are you looking for?
$25,000 – $10,000,000+
1.5% - 3.5%
24 - 48 Hours
Benefits of working with SMB Compass
Successful track record of supporting small businesses
Free consultations to discuss financing options
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Over $160 million delivered to 1,100+ small businesses
10+ years of business lending expertise
Flexible and low cost options available
$25,000 - $10,000,000+
1.5% - 3.5%
24 – 48 hours
What is Purchase Order Financing?
Purchase order financing, or PO funding, is a type of business financing that relies on your company’s purchase orders as collateral for a loan. By using purchase order financing programs, you can borrow up to 100% of the money needed to fulfill an order placed by one of your customers. Businesses of all sizes use purchase order funding to grow their businesses when the operating cashflow can’t support new orders. Purchase order financing is most commonly used for growing companies or for orders that are larger than normal. Although this is the case, many companies use purchase order financing as a revolving line of credit to run the day to day operations of their business. Speak with an Lending Advisor today to learn more about how purchase order financing can help your business.
What are the benefits of Purchase Order Financing?
Unlike traditional bank loans, purchase order financing requires minimal paperwork to get approved and can be funded in just a few days. Once you set up a PO funding relationship you can have certainty that once you receive a large order, you will be able to fulfill it, and fast. Using purchase order financing will allow you to quickly apply and get approved so you can go back to focusing on growing your business.
Capital is the number one constraint for growing businesses and no business owner wants to turn down new orders. Purchase order financing ensures that capital is available when you receive the PO so that you can fulfill every order, regardless of the size.
Purchase order financing is collateral backed and relies on the credit worthiness of your customer, unlike bank financing that relies on personal credit. If you have a history of executing on previous orders and have credit worthy client, purchase order financing is a perfect solution.
How does Purchase Order Financing work?
While other types of business financing usually involve only a lender and a borrower, purchase order financing involves just a few more parties. With PO financing there are four parties involved in each transaction. First, the business that received the purchase order. Second, the customer that placed the order. Third, the supplier that the receiving business purchases from. And finally, the lender that is providing the purchase order financing.
Below is a step by step process of purchase order financing:
You receive a new purchase order
Your supplier provides a cost breakdown to fulfill the order
You submit your purchase order and supplier cost breakdown to purchase order lender
Your purchase order lender pays your supplier
Your supplier makes the product, ships the goods, and you invoice your customer
Your customer pays the purchase order lender directly
When payment is received the purchase order company pays you the balance
What type of collateral is used for Purchase Order Financing?
PO’s or Purchase Orders are the primary asset used for purchase order financing. A purchase order is a document generated by the buyer to authorize a transaction with a seller. PO’s typically outline the terms of the sale, which include price, quantity, payment terms, shipping date, etc. Once this PO is accepted by the seller, a purchase order lender can use it as collateral. The LTV for purchase order financing is typically between 30-40%, but once goods are shipped or services are rendered, the PO becomes an invoice and the remaining 40-50% of the invoice can be advanced.
Accounts Receivable (A/R)
A/R or accounts receivable is the secondary asset used in purchase order financing. A/R is money that is owed to a company after a sale has been made or services have been rendered. For most purchase order lenders, the A/R of a company is how payment is collected after goods are shipped. The typical loan to value (LTV) for A/R is 90% of the face value of the invoice. This can vary based on the credit quality of your clients, the payment terms that are offered, and the diversification of your client base.
What are the best industries for Purchase Order Financing?
What is the difference between Purchase Order Financing and Invoice Factoring?
Both purchase order financing and invoice factoring use assets of your company to provide financing for new orders and day to day operations. With any B2B sale there is a standard chain that occurs. First, an order is place, then it’s fulfilled, shipped, and finally invoiced. Purchase order financing solves the liquidity need at the time an order is placed and needs to be fulfilled. Once an order is shipped and an invoice is created, you can use that invoice for invoice factoring. Because goods have yet to be shipped, there is more risk for a purchase order lender. Whereas in invoice factoring, goods have been delivered and accepted, resulting in lower risk for the lender and ultimately, lower rates and fees for a business owner.
What are Purchase Order Financing Rates and Fees?
PO financing rates range based on a variety of different factors and are typically more expensive than bank financing. Rates and fees can range from 1.5% to 3.5% per 30 days. It’s important to note that this is on the cost, not that PO value. For example, if you have a 100% gross margin and receive a purchase order for $100,000, it will cost you $50,000 to fulfill the purchase order. The fees for purchase order financing are based on the $50,000, not the $100,000. Below is a list of factors that have an effect on your rates.
The quality and size of your clients
Previous payment history with your clients
Length of payment terms with your clients - 30, 60, or 90 days
Your business credit score and vendor payment history
Profitability of your business
How long it takes to fulfill the purchase order
What documents are needed to get approved for an asset-based loan?
Profit and Loss Statement
A/R and A/P Aging Report
Business Tax Returns
Business Tax Returns
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FAQ About Purchase Order Financing
What is purchase order financing?
Purchase order financing a type of financing that uses a businesses purchase orders as form of collateral for a loan. Businesses can use the purchase order they received from a customer to secure the financing necessary to fulfill an order.
How do you qualify for purchase order financing?
Qualifying for purchase order financing is determined more by the customer’s trade and credit history then the existing business. The lender wants to verify that the customer giving the purchase order is a strong and trust worthy business.
How long does the application process take for purchase order financing?
The application process for purchase order financing is not overly document intensive and can be secured rather quickly. A lender has to verify the purchase order and confirm that the customer has strong trade history.
How would you use purchase order financing?
Businesses use purchase order financing for an array of different reasons to ensure there business is operating efficiently. Purchase order financing can be used to cover the expenses of customer’s orders as well as cover other daily expenses.
Is collateral required for purchase order financing?
The outstanding purchase order is used as the collateral to secure purchase order financing. A business is borrowing capital off the purchase order they have received from a customer.
Interested in learning about your financing options?
Speak with a Lending Advisor today!