What is purchase order financing?
Purchase orders are piling up and there is a shortage of money to buy goods from suppliers to fulfill the orders. Does this seem relevant? If so, purchase order or purchase order financing is the perfect solution to quickly get the money you need so badly to fulfill those orders.
In this article, you’ll learn what exactly PO financing is, how it works, and the top PO financing companies, let’s dive into it.
What is purchase order financing?
Purchase order financing is a business financing option where your purchase order financing company pays your supplier for the goods you buy to fulfill your customers’ orders. You need valid purchase orders and a vendor cost estimate to request purchase order financing.
Be aware that purchase financing is based on purchase orders from your customers, and you request it before invoicing your customers. If you want to access capital on your customers’ unpaid invoices in a tight cash situation, you should explore invoice financing or invoice factoring.
How does purchase order financing work?
The purchase order financing process is fast. So small business owners looking for financing won’t have to wait months for commercial financing.
Here’s how purchase order financing works:
- You receive a purchase order from your customer
- You contact your supplier to get the costs from the supplier to fulfill the customer’s order
- You contact a purchase order finance company with the customer’s purchase order and a cost estimate from the supplier to obtain a cash advance
- The supplier receives the payment from the finance company and the supplier directly delivers the goods to the customer
- You send an invoice to the customer for the completed order, and your customer pays the invoice amount to your finance company
- The PO finance company deducts its fees and sends you the remaining balance
One good thing about accessing working capital using purchase order financing is that you don’t need a strong credit history.
Purchase order funding approval often depends on the reputation of your customer and supplier. So, you can also qualify for purchase order financing even if you are a new business owner.
Can a Purchase Order Finance Company Benefit Your Small Business?
Wondering about the benefits of purchase order financing to fuel your 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’s how purchase order financing can benefit your small business:
- Borrowing money through purchase order financing is quick and easy. So you can run commands you wouldn’t be able to otherwise
- No personal guarantee is required. The finance company can fund purchase orders even if you don’t have a great credit history. This is because the finance company often focuses on your supplier and customer’s background or credit check.
- You can free up your capital to manage other business expenses because you don’t have to pay suppliers
Purchase order financing can increase your sales growth, you can’t control factors, such as when the financing company pays your supplier and when the supplier sends goods to your customer. This means that delivering customer satisfaction is not entirely within your control.
Also, if customers don’t make payments on time, purchase order financing costs will increase, which will affect your profit margin. Therefore, exploring other options to access the money is a smart choice.
Purchase Order Financing Qualifications
Different PO finance companies have different requirements for approving PO finance.
However, qualified companies generally have the following things in common:
- They are small B2B or B2G companies
- Small businesses should sell tangible end products
- Customer orders must be at least $15,000
- The client must have a good reputation and a good credit history
- The supplier must have a timely delivery history of goods
Companies that offer PO financing can also check the credit history of your customers and suppliers. You should speak to your purchase order finance company for detailed qualification criteria.
Purchase Order Finance Companies in 2022
Here are the top purchase order finance companies:
1. PME Compass
SMB Compass is a leading company, offering financing at a competitive price. For 30 days, SME Compass charges fees 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 finance company in the United States. So far, King Trade Capital has offered 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 offers a first response within approximately 72 hours. If approved, funding can be completed within 7-14 days.
Capstone specializes in factoring, trade and purchase order financing. corner stone is headquartered in New York.
5. Capital Franklin
Franklin Capital offers a wide range of financing solutions to help small businesses grow. To apply for PO funding with Franklin Capitalyou must submit recent financial statements, current age of accounts receivable and payable, copy of supplier agreements and purchase orders.
6. Ashford Finances
Ashford Finance claims to be more flexible than other financing options. So you need to check Ashford Finances if you can’t get PO financing from another company.
7. 1st trade credit
If you are in the distribution sector, 1st commercial loan can be an ideal option for purchase order financing. The company offers attractive financing rates from 1.5% to 5%. You must be in business for at least one year with tax returns to apply for PO funding from the company.
8. Liquid capital
Liquid Capital claims to provide approximately $3 billion in working capital to thousands of small businesses in North America. By visiting the site of Liquid capitalyou can estimate how much working capital you can claim.
Does the PO finance a loan?
No, purchase order financing is not a loan. It is a way to obtain funds in advance of customer orders. So you don’t have to pay interest or EMI. Instead, you will pay the purchase order finance fee to your finance company.
How much does purchase order financing cost?
PO financing costs between 1% and 6% for 30 days. Different PO finance companies charge different fees. You should take quotes from multiple companies to get the best deal.
What are the documents required for the financing of a purchase order?
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 a great way to fulfill orders that you can’t otherwise fulfill due to low cash flow. But you should try to find a company that charges the lowest fees. 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 for securing working capital for your small business.
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