Purchase order (PO) financing is an advance from a creditor that pays your suppliers for goods that you’re reselling or distributing. PO financing is an effective way to fuel business growth without taking on bank debt or selling equity in your company. You can finance up to 100% of the written purchase order costs, with typical rates falling between 1.15% and 6% per month. If sales outpace incoming cash flow, then purchase order financing might be a good fit to fulfill a new customer order.
To qualify for purchase order financing, a business must sell finished goods to business (B2B) or government (B2G) customers and have profit margins of at least 15%. Newer businesses can qualify for purchase order funding because approval is based primarily on the creditworthiness of, and your history with, your customers and suppliers. Your chances of being approved are higher if your customers and suppliers are well- established, reputable companies.
Using purchase order financing allows you to finance payments to your suppliers for manufacturing and transportation before you receive payment from your customers. You can’t use the funds for anything other than the purchase of specific goods to fulfill your customer’s order, unlike other working capital loans.
PURCHASE ORDER FINANCING PROCESS IN 8 STEPS
1. You receive a purchase order: Your business receives a large purchase order from a customer.
2. You receive a written cost proposal: The supplier submits a written proposal detailing what it would cost to purchase the goods necessary to fulfill the order. At this point, you can determine with certainty if financing is necessary.
3. You apply and get approved for purchase order financing: Once you have determined that PO financing is necessary, you’ll need to find the right purchase order financing company, apply for the necessary funding, and be approved. To apply, you’ll need to provide both the customer’s purchase order and the supplier’s cost proposal.
4. Purchase order financing company pays the supplier: Once your application is approved, the purchase order financing company pays the supplier to manufacture and deliver the goods to fulfill the purchase order. Payment is usually in the form of a letter of credit.
5. Supplier delivers the goods to the customer: The supplier usually delivers the goods to the customer directly. However, you may instead choose to have the goods delivered to your business location. Once the customer receives the goods, the order is considered accepted.
6. You extend terms to the customer: You invoice the customer for the goods and extend terms to your customer. The longer it takes to receive payment from the customer, the more expensive the purchase order financing becomes.
7. Customer pays the purchase order financing company: The customer pays the PO financing company directly for the full price on the invoice.
8. Purchase order financing company pays your business after deducting fees: The PO financing company deducts its fees from the funds and then pays the remaining balance to your business.