Cash flow problems when filling large orders are expected for most businesses. Whether you’re a startup business or have been in the industry for a while, you’ll likely experience low cash reserves at one point in your operation. Nothing feels as terrible as turning down an order that could have brought explosive growth to your business, and if you’re like most businesses, you’re likely going to seek out a business loan. In these cases, purchase order financing is a great funding solution that can help you get the cash you need to cover your business expenses without taking out a loan.
Find out what a purchase order is, how it works, and whether it’s right for your business.
What Is Purchase Order Financing?
Purchase order financing, also referred to as PO financing, is a funding solution for businesses that need quick access to cash to fill purchase orders. PO financing isn’t technically a loan. Instead, it’s an agreement between the buyer and the seller on the prices and the quantities of the goods.
If you’re a small business owner that receives several large orders and doesn’t have enough cash flow to fill such orders, PO loans can be a simple funding solution to ensure that you don’t turn away customers.
How Does Purchase Order Financing Work?
Unlike traditional loans that involve only a borrower and lender, with PO financing, you’ll work with the following parties:
Your Business/Company
Imagine receiving a purchase order from one of your best customers for goods you don’t have in stock. Instead of declining the order and risk losing your returning customer, you can apply for PO financing.
Purchase Order Financing Company/Lender
If you decide to seek financing to fill your purchase orders, the PO financing company is the lender you need. The PO financing lender will verify your PO order before paying the supplier.
Business Supplier
This is the company that produces, supplies, or distributes the goods to your customer. The PO financing company pays the supplier directly.
Customers
These are the ones who want to purchase goods and have sent you a purchase order. Typically, in a PO agreement, the customer pays the PO financing company once they receive the goods.
Here’s a step-by-step guide on how PO financing works:
- You receive a purchase order from a client but don’t have enough cash to fulfill it.
- Estimate the cost of the PO order with your supplier.
- Apply for PO financing. If approved, you may get up to 100% of the cost required to fulfill your customer’s order.
- Your supplier gets paid by the purchase order lender.
- The supplier then delivers the goods to the customer.
- You invoice your customer after they receive the goods.
- The customer pays the PO financing company directly.
- The PO financing company subtracts its fees and sends the rest of the money.
Is Purchase Order Financing Right for Your Business?
Purchase order financing is ideal for certain types of businesses with more purchase orders coming in than the inventory in stock or insufficient cash to fulfill such orders.
However, not all businesses qualify for PO financing. One of the key determinants used when evaluating your ability to qualify for PO funding is whether you sell a completed product. If you sell incomplete products or materials, your business may not be eligible for purchase order funding.
Generally, some of the types of businesses that might use PO loans include:
- Startups
- Distributors
- Wholesalers
- Resellers
- Outsourced manufacturers
- Importers or exporters of finished goods
- Companies with low credit scores
How To Use Purchase Order Financing to Grow Your Business
Purchase order financing can help grow your business in several ways, including:
Minimize Capital Constraints
Being in business, you probably know how challenging it is to stay afloat when fulfilling large orders. Purchase order financing means more operational cash, thus reducing capital constraints.
Allows Businesses to Get Larger Orders
Purchase order financing gives you the capability to take on large orders you couldn’t otherwise fulfill. It is a good fit for seasonal businesses that don’t have enough capital to fulfill large customer orders.
Improve Competitiveness Among Customers and Suppliers
With PO financing, your business will not only grow but also compete better with other companies in the same industries. This will help you stay ahead of the competition since you’ll fulfill all your customers’ orders.
Improve Business Cash Flow
All businesses go through ups and downs in their operations, and one major issue they often experience is a lack of enough working capital. Purchase order financing is a powerful financial vehicle that can help maintain business cash flow to provide the necessary goods to your customers on time.
Increase Product Availability
A company with low cash reserves typically tends to have less inventory. As a result, there’s a high chance of turning down customers with limited goods in stock. PO financing, however, provides the cash needed to have more than enough products for your customers.
Increase Sales Opportunities
Imagine a situation where you have more purchase orders than the goods you have in stock. If you don’t fulfill all the orders, you might end up losing both returning and new customers. Purchase order financing provides you with fast cash to fulfill more orders, increasing sales opportunities.
Creates Flexible Credit Terms for Customers
Unlike traditional bank loans that might put your business at risk if you fall behind on payments or default, purchase order financing offers a more flexible funding solution. Besides charging low fees, you can offset the balance to avoid payoffs after receiving from your customers.
How To Choose a Purchase Order Financing Company/Lender
Choosing a PO financing company to work with can be challenging, given the various options available in the market. Here’s what to look at when comparing PO lending options:
Experience
A company with years of experience in the industry and a good reputation behind them will likely yield positive results. You should ask questions: How long has the PO lender been in business? Has the company worked with businesses in your industry? What are previous customers saying about the lender? These are some of the questions that can give you a better idea of the PO lender’s experience.
Financing Process
The financing process matters a lot when choosing a PO lender. Some of the things you need to look at include:
- The minimum requirements to get approved
- How the lender pays suppliers
- How the company receives payments from your customers
- What happens if customers fail to pay?
- How early will you receive your payments after customers make their payments?
Fees And Other Requirements
Typically, PO lenders charge a percentage of the total of the supplier’s costs, so it’s wise to know how much you’re required to pay. Also, confirm if the PO company requires a personal guarantee and if there’s any other documentation needed.
