New businesses with a limited track record for success often encounter suppliers that are unwilling to offer flexible payment terms. If your company has the money to pay the balance in full, then it’s no problem. But, if you’re still trying to break-even, shelling out a significant amount to pay for inventory could result in cash flow gaps. Or worse, if you don’t have the money to supply a large volume, you’d have no choice but to turn customers away. Not only will this affect your sales, but it will also negatively impact your business reputation.
Fortunately, PO funding can help businesses avoid falling into these types of situations. Here’s what purchase order financing is, its benefits, and how it works.
What is Purchase Order Financing?
Purchase order (PO) financing is a business funding solution that allows small- to mid-sized businesses to leverage their purchase order to fulfill large volumes of customer orders. Often, companies selling finished goods lack enough inventory to meet the demands. Others may experience a cash flow gap that renders them unable to purchase the needed stocks to deliver the goods. In cases like this, they can leverage their purchase order to apply for advanced financing.
Both established and start-up companies can qualify for purchase order (PO) funding. PO financing allows start-ups to obtain funding so they can work on sustainable growth. It will enable them to take on orders, increase their sales, and boost their cash flow.
5 Benefits of PO Funding
Cash flow is the lifeline of any business. With PO financing, you won’t have to worry about limited cash flow forcing you to turn down profitable orders and other business opportunities. If you’re considering PO financing, here are five benefits it can offer:
1. Quick Access to Capital
Applying for PO financing is relatively quick compared to other types of business financing, like term loans. All you need to get your application started is your purchase orders and some financial documents like balance sheets, bank account statements, etc. Submitting complete documents can help expedite the process.
Once the financing company verifies the information and documents, approval will follow. In general, businesses applying for PO financing can receive funding within one to two weeks after approval.
2. Easy to Qualify For
Are you worried that a bad credit history might hinder you from qualifying for PO financing? The good news is, it won’t. Even if you have a poor credit history and a low credit rating, you still stand a chance of qualifying.
PO financing companies typically don’t base approval solely on the business credit background. It mostly looks at the credit of your customers and the type of supplier you’re working with. Ideally, your customers should have a good credit record, and your suppliers should be able to deliver products in a timely fashion.
The amount of funding the finance company will provide will also depend on your suppliers’ credit background and reputation. So, the better their track record is, the higher the funding the lenders would be willing to provide.
3. Allows Companies to Take on Large Orders
One of the most common problems that product-based companies typically encounter is the lack of capital to fulfill large orders. With PO financing, however, they will have the means to take on this new order. This way, they won’t have to refuse large customer orders.
Moreover, with enough funding, you won’t have to settle with mediocre suppliers or manufacturers. Having an extra financial resource allows you to scout only the best product manufacturing out there. With that, you’ll be able to deliver high-quality products to your clients, increasing customer satisfaction.
4. PO Funding Includes Payment Collection
Start-up companies can benefit a lot from the extra service the PO financing company offers: payment collection. Most of them typically don’t have the resources to handle payment collection themselves. With this additional service, they won’t have to worry about constantly nagging and chasing customers for payments. The PO financing company will do that on their behalf.
Once the customers settle their accounts, the financing company deducts the cash the business advanced, plus the transaction fees, and sends the remaining balance to you.
5. Credit Line Increases as Your Business Grows
As mentioned, the amount of funding the financing company would be willing to provide your company will primarily depend on the quality and volume of your purchase orders, your supplier, and your company’s ability to follow through with the order. The good thing is, you have complete control over these things.
If you constantly provide top-notch products to your customers, they’re more likely to return as repeat customers. In some cases, they may even recommend your business to other business owner friends. With that, you’ll have more business coming your way. As your business grows, your PO credit line would also increase to meet your orders’ funding requirements.
The bottom line: you’ll be able to take in more orders that you otherwise would have to turn down had you not applied for PO funding.
How PO Financing Works
Now that you’ve seen the bigger picture of PO financing, you probably want to know how it typically works.
The process of PO funding involves four parties:
- Business/borrower (the one who will apply for PO funding)
- Financing company
1. The customer places a large order
The process begins with the customer sending a large purchase order over to the business. The business evaluates the purchase orders and figures that they would need the PO financing company’s help to fulfill it.
2. The business sends the purchase order over to its suppliers
To get an estimate of how much they will need to execute the order, the business sends the purchase order over to the suppliers. The suppliers, in turn, estimate the cost and send a quote back to the company.
3. The business applies for a purchase order financing
Using the quote along with the financial documents, the business applies for PO financing. The financing company then evaluates the purchase order, performs a background check on the business’s customers and suppliers, then makes a decision.
Once approved, the funds will be transferred to the suppliers directly. This process could take one to two weeks. The financing company may provide funding up to 100% of the total amount of the purchase order. However, the amount will vary and depend on the customers’ credit rating.
4. The supplier fulfills the order and ships them to the business’ customers
The suppliers will confirm that they receive the funds and start working on the products according to the customers’ specifications. Once everything is ready, they will ship the products to the customers.
5. The business generates a customer invoice
After the customer confirms the arrival of the products, the business will send an invoice over. The business sets the payment terms, usually 30 to 90 days, depending on the amount of the orders. The customers must pay the balance within the given period, but they must pay the PO financing company instead of paying the business directly.
6. PO financing company handles the payment collection
The PO financing company will handle the payment chasing and collection on behalf of the business. After the customers settle their balances, the PO financing company hands the payments over to the business, minus the advanced cash plus transaction fees.
The Bottom Line: Is PO Funding the Right Funding Option for Your Start-up?
PO funding can be a helpful financing resource, especially if you’re faced with large customer orders and don’t have enough capital to fulfill these orders. Start-up companies are often the ones that experience this kind of challenge. It’s also a viable option for businesses experiencing rapid growth and needs an additional boost in their cash flow.
No matter what category you fall into, PO financing can help fill in the gaps in your cash flow. If used the right way, it could pave the way for your company’s growth and success.