Purchase Order Financing:
What is it?
Purchase Order Financing is a type of short-term funding that helps businesses pay suppliers for large orders. This financing option is particularly useful for businesses that receive more orders than they can afford to fulfill due to cash flow constraints. It allows businesses to take on new opportunities and grow without worrying about having the cash on hand to cover production costs.
Here’s how it works: When a business receives a purchase order from a customer, it can approach a lender or financing company to cover the cost of producing or acquiring the goods needed to fulfill the order. The lender pays the supplier directly on behalf of the business. Once the goods are delivered and the customer pays the invoice, the business repays the lender, including any fees or interest. The remaining balance is then returned to the business as profit.
Purchase Order Financing is ideal for businesses that experience seasonal spikes, rapid growth, or large orders that exceed their current working capital.
How do I get it?
To qualify for Purchase Order Financing, businesses need to meet several requirements. Here are the key ones:
Valid Purchase Order: The business must have a legitimate and verifiable purchase order from a creditworthy customer. Lenders need to be confident that the order is real and that the customer will pay for the goods.
Supplier Relationship: The business must have a reliable relationship with its supplier, and the supplier must be willing to accept payment from the financing company. The lender often pays the supplier directly.
Profit Margin: The business should have a sufficient profit margin on the order to cover the cost of financing and still make a profit. Lenders typically look for margins of at least 20% to 30%.
Business Financials: While purchase order financing is primarily based on the strength of the purchase order and the customer’s credit, the business may still need to provide financial statements or other documentation to demonstrate its ability to complete the order.
Type of Goods: Purchase Order Financing is typically used for tangible goods rather than services. The goods must have a clear resale value and be easily deliverable.
Customer Creditworthiness: The lender will evaluate the creditworthiness of the customer placing the order, as the repayment of the loan is dependent on the customer fulfilling their payment obligations.
Interest Rates and Fees:
Purchase Order Financing typically involves higher fees than traditional loans, often ranging from 1.8% to 6% per month on the advanced amount, depending on the risk level. Since it’s short-term financing, the costs can add up quickly if the customer delays payment. However, the flexibility and ability to take on larger orders often outweigh the costs for many businesses.
Questions:
Lenders typically look for a profit margin of at least 20% to 30% to ensure that the financing costs can be covered.
The process is usually quick, with approval and funding often occurring within a few days to a week, depending on the complexity of the order.
Simply fill out our application, and one of our Purchase Order Financing specialists will reach out within a few hours. They will provide the full list of documents needed, which will vary case by case.