Purchase orders are piled-up, and there is a shortage of money to buy goods from suppliers to fulfill orders. Does it sound relatable? If it does, then purchase order financing or PO financing is just the solution to quickly get the much-needed money to fulfill those orders.
In this article, you will learn what purchase order financing exactly is, how it works, and the top purchase order financing companies, let’s dive in.
What Is Purchase Order Financing?
Purchase order financing is a business financing option in which your PO financing company pays your supplier for goods you buy to fulfill your customers’ orders. You need valid purchase orders and estimated supplier costs to apply for PO financing.
You should note that purchase financing is based on your customers’ purchase orders, and you apply for it before invoicing to your customers. If you want to access capital on the unpaid invoices of your customers in a tight cash flow situation, you should explore invoice financing or invoice factoring.
How Does Purchase Order Financing Work?
The purchase order financing process is quick. So small business owners seeking financing won’t have to wait for months to get business funding.
Here is how purchase order financing works:
- You receive a purchase order from your customer
- You contact your supplier to get supplier costs to fulfill the customer’s order
- You reach out to a purchase order financing company with the customer’s purchase order and an estimate for the supplier’s costs to get a cash advance
- The supplier receives payment from the financing company, and the supplier delivers goods to the customer directly
- You send an invoice to the customer for the fulfilled order, and your customer pays the invoice money to your financing company
- The PO financing company deducts its fee and sends the remaining balance to you
A good thing about accessing working capital using purchase order financing is you don’t require a strong credit history.
Approval of purchase order funding often depends on the reputation of your customer and supplier. So, you can also qualify for purchase order financing even if you’re a new business owner.
Can a Purchase Order Financing Company Benefit Your Small Business?
Are you wondering about purchase order financing advantages to fuel business growth? Purchase order loans, in many cases, are good alternatives to using business credit cards, getting small business loans, and selling equity to address cash flow problems.
Here are ways purchase order financing can benefit your small business:
- Borrowing money through PO financing is quick and easy. So, you can fulfill orders that you otherwise wouldn’t be able to do
- There is no personal guarantee required. The financing company can fund purchase orders even when you don’t have an excellent credit history. This is because the financing company often focuses on the background or credit check of your supplier and customer
- You can free up your capital to manage other business expenses as you don’t have to pay suppliers
Purchase order financing can increase your sales growth, you cannot control factors, such as when the financing company pays your supplier and when the supplier sends goods to your customer. This means offering customer satisfaction is not entirely within your control.
Also, if customers don’t make timely payments, the PO financing fees will increase, affecting your profit margin. Therefore, exploring other options to access money is a wise choice.
PO Financing Qualifications
Different PO financing companies have different requirements for approving purchase order financing.
However, qualified businesses tend to have the following things in common:
- They are B2B or B2G small businesses
- Small businesses should sell tangible finished products
- Customer orders should amount to at least $15,000
- The customer should have a good reputation and credit history
- The supplier should have a track record of delivering goods in a timely way
Companies that offer PO financing can also check the credit history of your customers and suppliers. You should talk to your purchase order financing company for detailed qualifying criteria.
Purchase Order Financing Companies in 2022
The following are the leading purchase order financing companies:
1. SMB Compass
SMB Compass is a leading company, offering funding at a competitive fee. For 30 days, SMB Compass charges a fee of anywhere between 1.5% and 3%. The minimum funding amount allowed is $25,000, and the maximum is $10 million. To qualify for purchase order financing, a business must have a 30% profit margin.
2. King Trade Capital
King Trade Capital is another reputable purchase order financing company in the US. So far, King Trade Capital has offered around $2.5 billion to over 400 public and private companies worldwide.
With PurchaseOrderFinancing.com, you can get up to 100% financing for your purchase orders. The company offers a preliminary response within around 72 hours. If approved, funding can be done within 7-14 days.
Capstone specializes in Factoring, Trade, and PO financing. Capstone is headquartered in Newyork.
5. Franklin Capital
Franklin Capital offers a wide range of financing solutions to help small businesses grow. To apply for PO financing with Franklin Capital, you must submit recent financial statements, current aging of accounts receivable and payable, a copy of vendor agreements, and purchase orders.
6. Ashford Finance
Ashford Finance claims to be more flexible than other financing options. So, you must check Ashford Finance if you cannot get PO financing from any other company.
7. 1st Commercial Credit
If you’re in the distribution business, 1st Commercial Credit can be an ideal option for purchase order financing. The company offers attractive PO financing rates of 1.5% to 5%. You must be in business for at least one year with tax returns to apply for PO financing from the company.
8. Liquid Capital
Liquid Capital claims to offer around $3 Billion in working capital to thousands of small businesses across North America. By visiting the website of Liquid Capital, you can estimate how much working capital you can qualify for.
Is PO Financing a Loan?
No, PO financing is not a loan. It is a way of getting advance funds on customer orders. So, you don’t have to pay interest or EMI. Instead, you will pay purchase order financing fees to your financing company.
How Much Does Purchase Order Financing Cost?
Purchase order financing costs anywhere between 1% to 6% for 30 days. Different PO financing companies charge different fees. You should take quotes from multiple companies to get the best deal.
What Documents Are Required for Purchase Order Financing?
Copies of a customer’s purchase order, recent financial statements, current aging of accounts receivable and payable, copies of supplier agreements, and a summary of recent transactions are often required for purchase order financing.
However, the list of required documents varies from company to company.
Purchase order financing is an excellent way to fulfill orders you cannot otherwise complete due to poor cash flow. But you should try to find a company that charges the lowest fees. While you’re at it, reading articles on business loan terminology you need to know and how to get a small business loan can better prepare you to get working capital for your small business.
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