Are you wondering what is purchase order financing and how it can help your business? If you find yourself swamped with purchase orders and lack the capital to acquire goods from suppliers, PO financing could be the quick financial solution you need.
In this article, we’ll delve into the ins and outs of purchase order financing, how it operates, and highlight the leading companies in this field. Let’s dive in.
What Is Purchase Order Financing?
Purchase order financing is a specialized form of business financing in which a third-party company, known as a PO financing company, directly pays your supplier for the goods or materials you need to fulfill customer orders.
To qualify for this type of funding, you need to present valid customer purchase orders and provide estimates of the costs from your suppliers.
Unlike traditional loans, this funding method focuses on the value and reliability of your customers’ orders, making it particularly useful for businesses that may lack an extensive financial history.
You should be aware that purchase order financing is specifically tailored to your customers’ purchase orders. Therefore, you apply for this type of financial aid before you invoice your customers.
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If your concern is gaining access to immediate capital based on unpaid invoices from your customers, especially in tight cash flow scenarios, then other solutions like invoice financing or invoice factoring might be more appropriate.
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
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?
Contrary to popular belief, PO financing is not a conventional loan. Instead, it is a way to secure advance funds based on your confirmed customer orders, essentially bridging the gap between order placement and payment.
This means you are not obligated to pay interest rates or monthly installments (EMIs). What you will need to pay, however, are specific purchase order financing fees, which are charged by your chosen financing company.
- READ MORE: Business Loan Terminology You Need to Know
How Much Does Purchase Order Financing Cost?
The cost of purchase order financing can vary, with rates generally ranging from 1% to 6% for a 30-day period. Fees are dependent on various factors, including the financial stability of your suppliers and customers, and the risk assumed by the financing company.
To make an informed decision, it is advisable to gather quotes from multiple PO financing companies to compare and secure the most advantageous terms.
What Documents Are Required for Purchase Order Financing?
Typically, you will need to provide copies of a customer’s confirmed purchase order, recent financial statements from your business, a current aging report of accounts receivable and payable, copies of your agreements with suppliers, and a summary of recent transactions.
However, you should note that the list of required documentation can differ significantly between PO financing companies, and you may need to fulfill additional or varying criteria based on the company you choose.
Key Aspects of Purchase Order Financing
To better understand purchase order financing, we’ve put together a comparison table that outlines its key aspects. This table provides a quick overview of what PO financing is, how it works, its benefits and costs, the qualifications needed, and leading companies in the sector.
|Definition||A financing method where a PO financing company provides advance payments to suppliers on behalf of a business.|
|How it Works||1. Receive customer PO
2. Get supplier costs
3. Contact PO financing company
4. Supplier paid by financing company
5. Customer pays invoice to financing company
6. Remaining balance sent to business
|Benefits||Quick and easy, no strong credit history needed, enables growth.|
|Costs||Fees range from 1% to 6% for 30 days.|
|Common Qualifications||B2B or B2G, sell tangible finished products, customer orders at least $15,000, reputable customers and suppliers.|
|Top Companies in 2022||SMB Compass, King Trade Capital, PurchaseOrderFinancing.com, Capstone, Franklin Capital, Ashford Finance, 1st Commercial Credit, Liquid Capital|
|Required Documents||Customer's PO, financial statements, accounts receivable and payable aging, supplier agreements, transaction summary.|
Purchase order financing can be an invaluable resource for businesses grappling with inadequate cash flow to fulfill significant customer orders.
However, it’s crucial to partner with a PO financing company that offers reasonable fees. As part of your research, it may also be beneficial to read up on other financial terms and options, such as business loan jargon you should know, and guides on securing a small business loan.
This preparatory work can equip you with the knowledge to effectively navigate the complex landscape of business financing.
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