Have you ever been forced to decline a customer’s order because you couldn’t afford the necessary supplies to fill it? Unfortunately, cash flow problems are common among small businesses, and turning down an order from a customer not only tarnishes the reputation of your business, but the end results can even damage your company permanently.
Fortunately, purchase order financing (PO financing) solves this problem by advancing funds to a business which gives them the opportunity to fulfill single or multiple customer orders.
The usual costs associated with PO financing are in the range of 1.8% to 6% during the first month, but there can be additional costs thereafter. Most potential lenders require the following from a PO financing applicant:
- Good credit score/history of suppliers and customers
- Profit margins of 15% or more
- Must have business or government customers (B2C not eligible)
- Only sell tangible goods
How PO Financing Works
The PO financing process can be summarized in eight simple steps. Here’s what you need to know about the process of purchase order financing:
1. You Receive Orders from Customers
The first step is when your customer submits a purchase order where they indicate the type and quantity of good they want to purchase from your business.
2. Your Supplier Makes a Quote
The next step is to ask your suppliers for the total cost of your customer’s orders. They will most likely send you an invoice for the total amount of goods. This is when you realize you don’t have sufficient funds to fulfill your customer’s order.
3. You Apply for PO Financing
Once you discover you won’t be able to afford the necessary supplies, you can apply for PO financing. Purchase order financing often funds 80% to 90% of the total supplier cost. However, there are lenders who are willing to fund up to 100%, depending on your qualification requirements and the creditworthiness of your customers and suppliers.
4. PO Financing Company Pays Your Suppliers
After approval, the purchase order financing company will immediately pay your suppliers so they can start working on your customer’s orders.
5. The Goods are Delivered to Your Customers
Once the orders are complete, your supplier will ship the goods to your customers.
6. You Send an Invoice to Your Customers
Your suppliers will inform you once they deliver the goods so you can send an invoice to your customers. In the event your customers pay over an extended period of time, you might want to check out invoice factoring. You can sell your customers’ pending invoices to factoring companies in exchange for immediate cash.
7. Your Customers Pay their Dues to PO Financing Company
If you take on PO financing, your customers will pay their dues directly to the PO financing company, not to you. The faster your customers pay, the quicker you receive your profit.
8. The PO Financing Company Will Send the Profits to You
After receiving payment from your customers, the purchase order financing company will send you the money, minus a small fee for services rendered.
If you want to discover more about PO financing, SMB Compass finance experts can help you. Our lending specialists can answer all of the questions that relate specifically to your business situation.