Purchase Order Financing

purchase order financing

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Table of Contents

    What is Purchase Order Financing?

    Purchase order financing, also known as PO financing, is a funding solution for businesses that lack the working capital to fulfill purchase orders. In turn, PO financing companies give business owners the capital they need to pay suppliers and vendors.

    Essentially, PO funding capitalizes on the active purchase orders that a business uses as collateral to secure funding for a loan to fulfill its customer’s orders.

    By using this source to boost working capital and cash flow, purchase order funding for small business can borrow up to 100% of the money or cost needed to fulfill an order the customer places. This offers business owners flexibility when it becomes a challenge to fill active orders, which keeps your cash flow stable.

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    Loan Amounts

    $25,000 – $10,000,000+

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    Rates

    Starting at 15%

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    Speed

    24 - 48 Hours

    How does Purchase Order Financing work?

    While other types of purchase order funding for small business lending options typically involve interaction between a lender and borrower, PO funding often involves more participants. To be precise, four parties are usually involved in every transaction. 

    First, there is the seller, or the small business, that received the purchase order and needs additional working capital to fill the order. The second party is the customer that placed the order with the first party. The third party is the first party’s supplier of the finished goods. The fourth party is the lender providing the working capital to pay the suppliers.

    Business of all sizes use purchase orders to balance and maintain their operating cash flow. Without it, they would be unable to support new and existing orders. Filling purchase orders is critical for a business to stay functional, and purchase order financing is one way to accomplish this. By taking advantage of this financial resource as well as other financing options (i.e, lines of credit, invoice factoring, business credit cards, etc.), small business owners can easily fulfill orders.

    The purchase order financing process itself consists of seven key steps. A purchase order is received from a customer, which contains a breakdown of costs from the supplier. PO is submitted to the lender and the lender supplies the working capital and pays the supplier. The supplier in turn provides the goods to the customer who then pays the lender, and the lender pays the final balance to the borrower.

    Here’s a breakdown of the steps involved in Purchase Order (PO) Financing:

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    Who Can Use Purchase Order Financing?

    Small businesses that process a significant volume of purchase orders each month are eligible for purchase order financing. As a primary requirement, the business should be selling finished, assembled, and completed products. This means that a company that sells raw materials, instead of completed ones, won’t qualify for the financing. Purchase Order Financing Companies are financing businesses that doesn’t have solid cash flow to fund or complete customer orders. Also, Purchase Order Finance Companies offer the chance to invest in a business with little or no money upfront.

    A purchase order (PO) is a contract that buyers send which indicates the quantities, prices, and types of products or services they are looking to purchase to the PO Financing. These buyers usually order in bulk. However, without the right amount of cash, the suppliers cannot fulfill this order. For that reason, they usually apply for purchase order financing.

    This type of funding resource is most commonly used by companies that are rapidly growing and, or not able to fulfill the quantity or size of orders they have committed to. Companies that can take advantage of this financing plan include:

    • Start-up businesses
    • Wholesalers
    • Businesses with poor credit rating
    • Resellers
    • Government contractors
    • Manufacturers
    • Import and export companies

    What type of collateral is used for Purchase Order Financing?

    Unlike other types of lending services, PO funding is a specific type of lending vehicle that only considers purchase orders or accounts receivable as assets to be used as collateral to secure funding. Most asset-based lending sources also consider inventory, equipment, or real estate as collateral, but this financing option is restricted to the following types of assets:

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    PO Financing Rates and Fees

    Purchase order funding rates and fees are based on various factors that the lender considers. Because of the nature of the financial risk associated with this type of financing, the rates and fees are often more expensive than with other traditional bank financing sources. Purchase order funding is thus a viable and popular alternative for companies that require a rapid and efficient method of financing their purchase orders.

    Often, rates and fees range from 1.5% to 3.5% per 30-day period. It is important to highlight that the rates and fees are applied also to the cost of filling the order, not only the purchase order value.

    For example, if a borrower receives a 100% gross margin for a purchase order, and the purchase order has a total value of $100,000, the cost of filling the order would be $50,000. The purchase order financing rates and fees paid by the borrowing business after the customer is invoiced will be applied to the $50,000 cost of filling the order instead of the $100,000 that is invoiced to the customer.

    Different lenders take into account several different factors when evaluating applications. As much as possible, lenders try to aim for rates that are affordable, so it can support business growth. The lender will analyze the credit risk of the purchase order loans by assessing the borrowing business’s features and its client base when determining the rates, fees, and qualification status.

    What are the Qualifications for PO Financing?

    Aside from the fast approval benefit of PO financing, turns out, it’s also relatively easy to qualify for. All you have to do is to have a business that meets the following requirements:

    • Sell finished, assembled products
    • Accept purchase orders in large amounts
    • Sell to other businesses or government customers
    • Have reputable suppliers that offer high-quality products
    • Profit margins should reach at least 30%
    • Customers must have a good credit background

    Business owners interested in purchase order financing must remember that even if they don’t have a good credit rating, they can still qualify. As long as they can prove their customer’s creditworthiness and follow the guidelines above, they can take advantage of purchase order financing to improve their working capital.

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    FAQ

    How do you qualify for PO financing?

    The application and qualification process is determined by and based solely on the trade and credit history of customers, rather than the credit history of the borrowing small business, as is the case with other types of lending products.

    With purchase order financing, the lender is primarily concerned that the borrower’s customers who are being invoiced are financially healthy, and able to make the invoice payments.

    How long does the application process take for purchase order financing?

    Fortunately, the application process is not document-intensive, unlike other traditional lending programs. Usually, funds can be secured rather quickly with purchase order financing. Once the lender verifies the purchase order and confirms that the customer has a strong credit and trade history, the funds are approved, and the lender forwards payment to the supplier.

    How do you use PO financing?

    This type of funding is used by a variety of businesses for an array of different expense types. With PO financing, you are able to maintain a solid business cash flow so you can run your operations as efficiently and productively as possible.

    Is collateral required for purchase order financing?

    Unlike other types of asset-based lending sources, PO funding uses the outstanding purchase order as collateral to secure the funds.

    Instead of using inventory, equipment, or real estate as collateral, you are able to capitalize on your existing purchase orders and obtain the funds you need in order to fill requisitions.