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Are you wondering what purchase order financing is and how it can help your business? If you find yourself swamped with purchase orders and lack the capital to acquire goods from suppliers, PO financing could be the quick financial solution you need.

What Is Purchase Order Financing?

Purchase order financing is a specialized form of business financing in which a third-party company, known as a PO financing company, directly pays your supplier for the goods or materials you need to fulfill customer orders.

To qualify for this type of funding, you need to present valid customer purchase orders and provide estimates of the costs from your suppliers.

Unlike traditional loans, this funding method focuses on the value and reliability of your customers’ orders, making it particularly useful for businesses that may lack an extensive financial history.

It is important to understand that purchase order financing is designed specifically for your customers’ purchase orders. As a result, you need to apply for this type of financial assistance before sending invoices to your customers.

Suppose you need immediate capital based on unpaid invoices from your customers, particularly in situations with tight cash flow. In that case, other options, such as invoice financing or invoice factoring, may be more suitable.

Can a Purchase Order Financing Company Benefit Your Small Business?

Are you wondering about the advantages of purchasing order financing to fuel business growth? Purchase order loans, in many cases, are good alternatives to using business credit cards, getting small business loans, and selling equity to address cash flow problems.

Here are ways purchase order financing can benefit your small business:

• Securing funds through purchase order financing is a fast and straightforward process. This enables you to fulfill orders that you might not have been able to complete otherwise.
• There is no personal guarantee required. The financing company can fund 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

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 sends goods to your customer. This means offering customer satisfaction is not entirely within your control.

Also, if customers don’t make timely payments, the PO financing fees will increase, affecting your profit margin. Therefore, exploring other options to access money is a wise choice.

 

• READ MORE: Small Business Funding Options

How Does Purchase Order Financing Work?

The purchase order financing process is quick. So small business owners seeking financing won’t have to wait for months to get business funding.

Here is how purchase order financing works:

• You receive a purchase order from your customer
• You contact your supplier to get supplier costs to fulfill the customer’s order
• You reach out to a purchase order financing company with the customer’s purchase order and an estimate for the supplier’s costs to get a cash advance
• The supplier receives payment from the financing company, and the supplier delivers goods to the customer directly
• You send an invoice to the customer for the fulfilled order, and your customer pays the invoice money to your financing company
• The PO financing company deducts its fee and sends the remaining balance to you

A good thing about accessing working capital using purchase order financing is you don’t require a strong credit history.

Approval of purchase order funding often depends on the reputation of your customer and supplier. So, you can also qualify for purchase order financing even if you’re a new business owner.

Purchase Order Financing Companies

The following are the leading purchase order financing companies:

SMB Compass

SMB Compass is a leading company, offering funding at a competitive fee. For 30 days, SMB Compass charges a fee of anywhere 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.

King Trade Capital

King Trade Capital is another reputable purchase order financing company in the US. So far, King Trade Capital has offered around $2.5 billion to over 400 public and private companies worldwide.

PurchaseOrderFinancing.com

With PurchaseOrderFinancing.com, you can get up to 100% financing for your purchase orders. The company offers a preliminary response within around 72 hours. If approved, funding can be done within 7-14 days.

Capstone

Capstone specializes in Factoring, Trade, and PO financing. Capstone is headquartered in New York.

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, current aging of accounts receivable and payable, a copy of vendor agreements, and purchase orders.

Ashford Finance

Ashford Finance claims to be more flexible than other financing options. So, you must check Ashford Finance if you cannot get PO financing from any other company.

1st Commercial Credit

If you operate in the distribution sector, 1st Commercial Credit is an excellent choice for purchase order financing. The company provides competitive PO financing rates ranging from 1.5% to 5%. To qualify for PO financing, you need to have been in business for a minimum of one year and must provide tax returns as part of your application.

Liquid Capital

Liquid Capital claims to offer around $3 Billion in working capital to thousands of small businesses across North America. By visiting the website of Liquid Capital, you can estimate how much working capital you can qualify for.

PO Financing Qualifications

Various PO financing companies have distinct criteria for approving purchase order financing.

However, qualified businesses tend to have the following things in common:

• They are B2B or B2G small businesses
• Small businesses should sell tangible finished products
• Customer orders should amount to at least $15,000
• The customer should have a good reputation and credit history
• The supplier should have a track record of delivering goods in a timely way

Companies that provide PO financing can also assess the credit history of both your customers and suppliers. It’s advisable to consult with your purchase order financing company to understand the specific qualifying criteria in detail.

Is PO Financing a Loan?

Contrary to popular belief, PO financing is not a conventional loan. Instead, it is a way to secure advance funds based on your confirmed customer orders, essentially bridging the gap between order placement and payment.

This means you are not obligated to pay interest rates or monthly installments (EMIs). What you will need to pay, however, are specific purchase order financing fees, which are charged by your chosen financing company.

 

• READ MORE: Business Loan Terminology You Need to Know

How Much Does Purchase Order Financing Cost?

The cost of purchase order financing can vary, with rates generally ranging from 1% to 6% for a 30-day period. Fees are dependent on various factors, including the financial stability of your suppliers and customers, and the risk assumed by the financing company.

To make an informed decision, it is advisable to gather quotes from multiple PO financing companies to compare and secure the most advantageous terms.

Key Aspects of Purchase Order Financing

To enhance your understanding of purchase order financing, we have created a comparison table that highlights its essential features. This table offers a concise overview of what PO financing entails, how it operates, its advantages and expenses, the qualifications required, and the top companies in the industry.

Criteria	Details
Definition	A financing method where a PO financing company provides advance payments to suppliers on behalf of a business.
How it Works	1. Receive customer PO 2. Get supplier costs 3. Contact PO financing company 4. Supplier paid by financing company 5. Customer pays invoice to financing company 6. Remaining balance sent to business
Benefits	Quick and easy, no strong credit history needed, enables growth.
Costs	Fees range from 1% to 6% for 30 days.
Common Qualifications	B2B or B2G, sell tangible finished products, customer orders at least $15,000, reputable customers and suppliers.
Top Companies in 2022	SMB Compass, King Trade Capital, PurchaseOrderFinancing.com, Capstone, Franklin Capital, Ashford Finance, 1st Commercial Credit, Liquid Capital
Required Documents	Customer’s PO, financial statements, accounts receivable and payable aging, supplier agreements, transaction summary.

What Documents Are Required for Purchase Order Financing?

Typically, you will need to provide copies of a customer’s confirmed purchase order, recent financial statements from your business, a current aging report of accounts receivable and payable, copies of your agreements with suppliers, and a summary of recent transactions.

However, you should note that the list of required documentation can differ significantly between PO financing companies, and you may need to fulfill additional or varying criteria based on the company you choose.

Takeaways and Additional Resources

Having explored the concept of purchase order financing, let’s now look at some critical takeaways for businesses and explore additional resources that can expand your knowledge and aid in your financial strategy.

Key Takeaways:

• Vital Tool for Cash Flow Challenges: Purchase order financing is crucial for businesses needing to fulfill large customer orders but struggling with cash flow issues.
• Importance of Choosing the Right Partner: It’s essential to choose a PO financing company with reasonable fees and good terms.

Additional Resources for Enhanced Understanding:

• Broaden Financial Knowledge:
  • Understand different business loan terms.
  • Learn about various financing options like invoice financing and asset-based lending.
• Stay Informed About Market Trends:
  • Keep up with financial news and industry reports.
  • Participate in financial webinars and follow business finance blogs.
• Seek Expert Advice:
  • Talk to financial advisors for personal guidance.
  • Join business finance workshops for more tailored insights.

Strategic Financial Planning:

• By enhancing your financial knowledge and planning strategically, you can better navigate the complexities associated with business financing.
• This strategy is essential for making informed decisions and guiding your business toward growth and stability.

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This article, “What Is Purchase Order Financing and Can it Benefit Your Business?” was first published on Small Business Trends