Purchase Order Financing: How It Works, Rates and Terms

Did you get a large order but you don’t have enough working capital to fulfill it? Don’t worry, you are not alone. Often a company's greatest challenge is not sales or production, but simply locating the financing required to pay suppliers. Luckily there’s an accessible financing solution that can help you accept that nice contract.

With purchase order financing you can get up to 90% of the cost of goods necessary to complete an order.

This article will detail all that you need to know about this popular funding product.

You’ll learn:

1. The Definition of Purchase Order Financing
2. How Does Purchase Order Financing Work?
3. P.O. Financing Example
4. Who Can Benefit From P.O. Funding?
5. Pros and Cons of Purchase Order Finance
6. How Much Does Purchase Order Financing Cost?
7. Purchase Order Financing and Factoring
8. Working With a Purchase Order Financing Company

P.O. financing companies advance between 70 to 100% of an order amount. After paying the vendor they wait until the customer pays to recover the funds and deduct their fees.

It is very common for a P.O. finance arrangement to transition into an invoice factoring transaction right after the goods are delivered. We’ll talk more about P.O. funding and receivable factoring later in this document.

Who Uses Purchase Order Finance?

This service is best suited for manufacturers, distributors, or wholesalers. Service providers are generally ineligible for P.O. Funding.

The following industries and commercial conditions can benefit from using purchase order finance:

Situations

• Firms with an insufficient or bad credit history that prevents them from qualifying for bank loans.
• Small business owners that need to finance customer orders and don’t have enough working capital to pay suppliers.
• Companies with seasonal sales peaks that create temporary working capital needs.
• Enterprises of all sizes when they receive unusually large orders.
• Startups in which fast growth is creating additional cash flow needs.
• In general any organization with cash flow problems and none or limited access to bank financing.

Industries

• Wholesalers and distributors
• Manufacturers
• Government contractors
• Resellers, drop shippers and outsourcers

Benefits & Downsides of P.O. Financing

Using purchase order financing can benefit a cash strapped business enormously but, like most alternative financing products, it has many negatives in comparison with traditional financing. Here are some pros and cons for you to consider:

Advantages

• Easier to qualify than bank financing.
• P.O. financing is not a loan and does not create debt.
• No periodic installments are required.
• No need to manage collections.
• Prospects with low credit scores or a lack of financial history can get approved.
• Approval is based on the creditworthiness of your supplier and client, not yours.
• Flexible funding solution, use as needed without long-term commitments.
• No personal guarantees are required.
• Funding is provided in just a few days from approval.
• Allow small business owners to receive new contracts that normally they won’t be able to fulfill.
• Frees up working capital to be used on other projects.
• Great for small businesses, startups, and fast-growing companies.

Disadvantages

• It’s not easy to get 100% financing.
• Your clients have to send the checks directly to the financing company so they will know that a 3rd party is involved.
• Service providers do not qualify.
• It can get expensive in comparison to other traditional financial alternatives.
• It can only be used to finance the purchase order you are approved for.
• Many lenders only provide finance for large orders.
• You are approved only if both your client and supplier have a strong financial background.

What Does Purchase Order Financing Cost?

The following are the most common terms found in P.O. financing agreements in the market these days.

Essentially P.O. Funding is an unsecured loan and the discount fees are reflective of the risk each transaction involves. Still, the costs are low in comparison to short-term alternative loans.

Amount Financed

With P.O. funding advances are provided to cover the cost of supplies typically between 70% and 90% of a purchase order amount. 100% finance is not impossible to get but very unusual.

Funding Speed

The first time you request financing for specific clients and providers the transaction can take between 1 to 2 weeks to fund. Repeated deals and ongoing relationships can fund in just a few days.

Purchase Order Financing and Factoring

Invoice factoring is a financial transaction frequently used by businesses with weak cash flow that give their customers payment terms. Instead of having to wait to get paid, the business sells the receivable to a factoring company and gets a cash flow advance. Then the factor waits for the payment, deducts its fees, and gives the business the balance.

It’s very common for businesses to factor the invoices right after the orders are delivered because factoring is cheaper than purchase order funding. Instead of paying the typical purchase order finance fees of 3 to 6% a month while waiting to get paid, you can save money by taking advantage of the 1 to 3% invoice factoring rates.

Here’s how it works:

1. Right after the supplier delivers the goods and the business issues a bill, the receivable is factored.
2. A portion of the invoice factoring advance is used to pay off the purchase order financing amount and fees owed.
3. The arrangement becomes an invoice factoring deal and it’s financed until the debtor pays.

This strategy prevents cash flow crunches and helps you save money by considerably decreasing the amount paid in financing fees.

You can learn everything about invoice factoring and how it works here.

Working With Our Purchase Order Funding Company

We can help growing businesses finance their ability to fulfill purchase orders. We provide funding to buy materials and finished products, pay workers, or any other input needed to complete the sale and generate an invoice.

Our purchase order funding solutions come in two forms. We can either guarantee payment directly to the vendor or we can establish a line of credit with the vendor. In either case, we help cash-strapped businesses get the materials they need to meet their clients’ demands.

Our P.O. Funding Services

We offer purchase order funding for transactions between $50,000 and $250,000. Much like our factoring solutions, we base purchase order funding approvals on the ability of your client to pay the invoice. That focus allows us to offer funding to a broad base of businesses.

We can provide letters of credit and vendor guarantees. Don't forget the comfort in knowing you have a reliable resource to fulfill those contracts.

• Benefits are immediate with our purchase order funding solutions
• Helps ensure timely delivery
• Builds credibility with suppliers
• Increases market share

Never Say No to a New Order. Call our toll-free phone 1-855-424-2955 today. We'll love to show you what we can do for you.

Author Marc J Marin