What is purchase order financing?
A growing number of companies are reaping the benefits of purchase order financing. Those companies that are paid by purchase orders – guarantees that they will be paid for their products – find that working with purchasing order funding companies can quickly resolve their cash flow problems, without incurring a dime of debt. Often their customers have often negotiated long payment terms – 30 days, 60 days, or even 120 days. That delay in payment for products delivered is why so many companies make the strategic decision to work with PO finance companies.
Purchase order financing can be very easily misunderstood in the factoring industry. Many businesses incorrectly assume the purchase order is used to have money paid directly to them. This isn’t how it works. Purchase order funding has a specific set of requirements and thus caters to a select group of customers. Purchase order financing enables resellers and distributors, with purchase orders exceeding their funding abilities, to receive funds that will allow them to honor their commitments to customers. The good news is that purchase order financing rates can be lower than you might think.
The definition of purchase order financing
One legal dictionary defines the process very succinctly:
Purchase order financing is a method for a business to obtain quick capital. The steps to purchase order financing are:
- Get a purchase order from a customer
- Find a reliable supplier for the products
- Place the order with that supplier
From a business perspective, purchase order financing makes good sense when your reserves of cash are low because this alternative financial solution frees up your cash right away. purchase order financing is not a loan – you are not borrowing money and you are not accruing debt. You are, however, positioning your company for better liquidity and approval for more financing as you need it in the future.
How does purchase order financing work?
If you are a wholesaler or distributor who cannot fulfill outstanding orders because you don’t have enough cash on hand to buy the products that you need to sell to your customers, purchase order funding is for you. First and foremost, your company must be a good candidate for purchase order financing. The following general criteria apply:
- Your company must buy and sell products without having to carry out any modifications or alterations.
- Company gross margins should be set at no less than 20%.
- Your chosen suppliers must be financially stable, have a good commercial credit rating and be able to deliver on your order quantities.
- Your purchase orders cannot be cancelled.
If you qualify for PO financing, the purchase order financing company will pay your supplier directly and your ordered goods will be manufactured and delivered. The PO finance company then collects payment from your customer. When used in conjunction with factoring, your total transaction cost can be kept at a minimal amount.
Who offers purchase order financing?
purchase order financing can be provided by financial institutions or trusted factoring companies such as Interstate Capital. Not all PO finance companies have a long history of working with clients who are paid by purchase orders, but Interstate Capital has almost a quarter of a century of experience helping countless companies maintain steady working capital with reasonable purchase order financing rates.
Should you consider purchase order financing?
Many companies simply never reach their goals and targets as a result of their orders outweighing their ability to keep up with the necessary supply capacity. With purchase order financing you will never have to turn away a large order due to a lack of available cash. Taking out a business loan or a personal loan can take a long time and end up to be expensive in the long run. Purchase order financing offers short-term advances, which can be settled as soon as your order is fulfilled and your client has paid. It’s a great way to maintain a healthy cash flow and keep your customers happy, all without borrowing money at high interest rates.
When should you use purchase order financing?
purchase order financing is the ideal financing solution if you don’t have the funds to finance a large order. If you receive a large order and you don’t have the funds available to pay the supplier upfront, purchase order financing can help your business succeed. You can benefit from working with a PO finance company if your margins are set to at least 20%. As a rule, PO financing is only provided if the purchase order you have received cannot be cancelled.
How do you get started with purchase order financing?
To get started with purchase order financing, you must meet the minimum requirements listed above. Then simply get in touch with a reliable factoring company such as Interstate Capital and request a quote for PO financing rates and further information.
What is the difference between purchase order financing and factoring?
Factoring is an outstanding cash flow solution for any company that invoices creditworthy customers and has to wait to get paid. If you give your customers 60, 90 or even 120 days to pay, the factoring company will be able to advance you the invoice amount, less a small factoring fee as set by the PO financing rates.
Purchase order financing is quite different. Rather than working with invoices that you are ready to issue to your customers, you must have a purchase order in your possession to qualify. When people send their purchase orders to purchase order funding companies, they will receive a large portion of the amount of the PO minus a small financing fee, so that they will have the cash upfront to fulfill your customers’ orders. The purchase order financing company will then collect the amount on the PO from your supplier directly. In addition to the funds that are advanced upfront, you’ll receive the balance of the PO value after your customers have sent payment in full to the PO funding company.
What are the benefits of purchase order financing?
This type of funding is short-term and transactional, which means you can use it when you need it. You are not locked into long-term loans or commitments. You’ll also find that you can qualify for PO financing much more easily than you’ll qualify for a bank loan. The process is fast, simple, and easy when you work with purchase order financing experts at Interstate Capital. You will be able to honor large customer orders and grow your business.
purchase order financing does not show up on your credit report as a debt, which is another benefit. In addition, the cash infusion that Interstate Capital clients receive enables them to take advantage of their suppliers’ early payment and volume discounts.
Will purchase order financing work for startups?
Purchase order financing is the ideal finance solution for startups. In many instances, new business owners can struggle to obtain financing, as their new company is not considered “credit-worthy.” With purchase order financing, the approval is based on the creditworthiness of the end customer, not the applying company. Startups applying to purchase order funding companies are typically expected to have an existing relationship with the supplier and have some experience in fulfilling large orders (even if acquired at a previous job).
Will purchase order-financing work for small businesses?
Yes. Purchase order financing, along with factoring, is ideal for stabilizing small business cash flow and for providing access to working capital. What’s more, funding can be set up in a couple of days. This is particularly beneficial if creditworthy customers are placing large orders on an ongoing basis.
Will purchase order financing work for service industries?
In most instances PO finance company do not work with companies in the services industry. In order to qualify, applicants must sell tangible goods to the government or commercial sector.