A Step-by-Step Guide to Purchase Order Financing

Ezra Cabrera

April 19, 2019
po financing

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 that 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 purchase order process is not as complicated as it sounds. To help you further understand the process, it’s important to familiarize yourself with a few terms:

  • The Borrower/Seller: This is you, the person/company looking to apply for purchase order financing to fulfill customer orders.
  • Supplier: The company where you get your products from. They’re the ones who manufacture and distribute the goods to your customers.
  • Purchase Order Financing Lender: The lending company that offers purchase order financing.
  • Customer: This is your business’ customers. They’re the ones who gave you a written purchase order for the goods they want to purchase from you.

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 goods they want to purchase from your business. Once you receive the purchase order from your customers, you’ll most likely have an idea of whether you need to tap into purchase order financing to fulfill it or not.

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. Not a lot of people qualify for 100% purchase order financing. In this case, you have to take matters to your own hands and pay the difference out of pocket.

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.

How Purchase Order Financing Can Help Your Business

Purchase order financing is a great funding option for all types of businesses. Seasonal businesses, growing companies, and cash-strapped businesses can all benefit from PO financing. But before you apply for purchase order financing or for any time of funding, it’s important that you understand the pros and cons of the financing option you choose.

Purchase order financing is available for applicants that meet the eligibility requirements. Keep in mind that financing requirements vary from lender to lender. To determine if you qualify for PO financing, it’s best to speak with a lending expert. They can answer any questions you have before you commit to a loan program.

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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