Purchase orders pile up and there is a shortage of money to buy goods from suppliers to fulfill orders. Sound relatable? If it does, purchase order financing or PO financing is just the solution to quickly get the much-needed cash to fulfill those orders.
In this article, you’ll learn what exactly purchase order financing is, how it works, and the top purchase order financing companies, let’s dive deeper.
What is purchase order financing?
Purchase order financing is a business financing option where your PO financing company pays your supplier for the goods you purchase to fulfill your customer orders. You need valid purchase orders and supplier estimated costs to apply for PO funding.
You should note that purchase financing is based on your customers’ purchase orders and that you request it before invoicing your customers. If you want to access the equity of your customers’ unpaid invoices in a tight cash flow situation, you should explore invoice financing or invoice factoring.
How does purchase order financing work?
The purchase order funding process is fast. So small business owners looking for financing won’t have to wait months to get business financing.
Here’s how purchase order financing works:
- You receive a purchase order from your customer
- Contact your supplier to obtain the supplier’s costs for fulfilling the customer’s order
- Contact a purchase order financing company with the customer’s purchase order and an estimate of supplier costs to obtain a cash advance.
- The supplier receives payment from the financing company and the supplier directly delivers the goods to the customer
- You send an invoice to the customer for the fulfilled order and your customer pays the invoice money to your finance company
- The PO finance company deducts their fee and sends you the remaining balance
One good thing about accessing working capital through purchase order financing is that you don’t need a strong credit history.
Approval for purchase order financing often depends on the reputation of your customer and supplier. Therefore, you can also opt for purchase order financing even if you are a new business owner.
Can a Purchase Order Financing Company Benefit Your Small Business?
Inquiring about the benefits of purchase order financing to drive business growth? Purchase order loans, in many cases, are good alternatives to using business credit cards, obtaining small business loans, and selling equity to solve cash flow problems.
Here are ways purchase order financing can benefit your small business:
- Borrowing money using PO financing is quick and easy. Therefore, you can fulfill orders that you could not otherwise do
- No personal guarantee is required. The financing company can finance 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
While 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 ships goods to your customer. This means that delivering customer satisfaction is not entirely within your control.
Also, if customers don’t make timely payments, PO financing fees will increase, impacting your profit margin. Therefore, exploring other options to access the money is a wise choice.
PO Funding Qualifications
Different PO financing companies have different requirements for approving purchase order financing.
However, qualified companies usually have the following things in common:
- They are small B2B or B2G companies
- Small businesses should sell tangible finished products
- Customer orders should be at least $15,000
- The customer must have a good reputation and credit history
- The supplier must have a history of delivering goods in a timely manner
Companies that offer PO financing can also check the credit history of your customers and suppliers. You should speak with your purchase order financing company for detailed qualification criteria.
Purchase order financing companies in 2022
The following are the main purchase order financing companies:
1. SMB compass
SMB Compass is a leading company that offers financing at a competitive price. For 30 days, SMB Compass charges a fee of between 1.5% and 3%. The minimum amount of funding allowed is $25,000, and the maximum is $10 million. To qualify for purchase order financing, a company must have a 30% profit margin.
2. Capital Commerce King
King Trade Capital is another reputable buy order financing company in the US. To date, King Trade Capital has provided approximately $2.5 billion to more than 400 public and private companies worldwide.
With PurchaseOrderFinancing.com, you can get up to 100% financing for your purchase orders. The company provides a preliminary response within 72 hours. If approved, funding can be done within 7 to 14 days.
Capstone specializes in factoring, trade and PO financing. Capstone is headquartered in New York.
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, the current age of accounts receivable and payable, a copy of supplier 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 finance from any other company.
7. 1st Commercial Credit
If you are in the distribution business, 1st Commercial Credit can be an ideal option for purchase order financing. The company offers attractive financing rates of 1.5% to 5%. You must be in business for at least one year with tax returns to apply for business PO financing.
8. Liquid capital
Liquid Capital claims to provide approximately $3 billion in working capital to thousands of small businesses across North America. By visiting the Liquid Capital website, you can estimate how much working capital you can benefit from.
Is PO financing a loan?
No, PO financing is not a loan. It’s a way to get 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 between 1% and 6% for 30 days. Different PO financing companies charge different rates. You should get quotes from several companies to get the best deal.
What documents are needed for purchase order financing?
Copies of a customer’s purchase order, recent financial statements, current age of accounts receivable and payable, copies of vendor 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 that you would otherwise be unable to complete due to poor cash flow. But you should try to find a company that covers the lowest rates. 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.
Image: Envato Elements