Purchase Order Financing
Purchace Order Financing
Trying to understand the benefits and just the basis of purchase order financing is very important for small business owners who are looking to consider the option of purchase order financing. It’s very important to understand the different options that are available to bring extra funds for your small business.
Here you will have the knowledge and understanding of purchasing order financing and how is it effective and beneficial for you.
What Is Purchase Order Financing (Po Financing)?
Purchase order financing or PO financing is an option of funding for businesses that need cash for multiple or single customer orders. In several companies, the cash flow problem does exist and becomes a very pivotal issue with the growth and development of the company and the business. Sometimes there will be situations where there is not enough money to cover the costs of running a proper business. There may be orders from different clientele that you fail to complete due to cash problems, sometimes you might not have proper resources and supplies that are needed to meet the client’s needs. This would lead you to turn down the order of the client which would negatively affect the revenue and the reputation of your business.
The reputation of your company and business will highly be affected and if this information gets around that your company is not able to complete jobs, and is turning down business that would directly affect your trust with the customers. Other companies and groups who give you their business and trust might think twice. To avoid such situations and scenarios, it is important companies need to find ways to get the money they need. Purchase order financing is a great way to deal with this problem.
PO financing has one company paying the distributor and supplier of another company, for stocks and commodities that have been ordered to complete a job for a client. It is an advance. This financing may not be for the complete amount and bill of the supplies, but it covers a good portion of it. But there are some cases where businesses could be eligible for 100% financing.
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How Does Purchase Order Financing Function?
Several options are available in the market. In a purchase order financing, there are majorly two options that are available for you to select from. Firstly, the PO Finance company would gather and collect the account and bill from the end customer or client. The PO Finance company then charges the company in need of funds for different purposes and fees and makes its money. These fees are from the assemble account or invoice, the remaining amount is returned to the company.
The second option is when the PO Finance company opens up a line and stream of credit with the supplier and distributor. This credit will be opened in their respective names and be backed by them. Businesses with poor credit and not sufficient assets to get the supplies they need, this line of credit become very beneficial.
Purchase order loans and financing help you complete and fill customer orders. If your business cannot fulfill the delivery means and supplies of a customer’s purchase order, purchase orders financing offers you the funds in advance to complete the job. It does not send funds or money to your bank account, but the money is directly advanced to your supplier. The supplier delivers the commodities and goods to the client, and the client directly then pays the supplier. The supplier will then deduce their fees and the remaining amount would be paid back to you.
Like we made it clear earlier, that it is possible to finance 100% of the cost of filling the order, but mostly the loan will be issued and registered for less than 100% of the supplier cost. This is because the moneylender or the financier wants to check that you have some money of your own that you could bring forward to the table. The interest rates for purchase order financing ranges between 1.8% and 6% per month.
Purchase order loans typically takes one to two weeks to fund. Purchase Order Financing may not be the best option for your business if you need money or cash immediately, because of the longer time haul. Purchase order financing is funding you get before the delivery of the goods and commodities to your customers and before invoicing you the customer. You need invoice financing and not purchase order financing if you have already delivered your products and goods and invoiced the customer.
A Basic Step By Step Process Of Po Financing
The process of purchase order financing is pretty simple and clear. Before we discuss the steps we need to understand a few terms.
There is a BORROWER/SELLER, who you is, the person looking for advance funding to fulfill and complete a purchase order. Then there is a PURCHASE ORDER LENDER/ PURCHASE ORDER FINANCING COMPANY, who is the financer of the company that gives you the financing and the funding. We then have a SUPPLIER, which is normally the company that distributes or manufactures goods and products. Lastly, we have a CLIENT/CUSTOMER, who tried to buy the goods and has given you a proper official purchase order for the goods.
- You receive a purchase order, your client submits a purchase order that specifies the kind and capacity of goods they would like to buy and purchase. This begins the process. Based on the initial information you received from this purchase order, you will have an idea if you would need financing to complete it.
- Your supplier will estimate the costs. You will need to ask the supplier for all the costing for the amount and kind of goods asked by the client. The supplier will then send you an amount and invoice for all the costs. This is the point you affirm that you cannot afford to complete the order because you don’t have enough cash to buy the supplies you need.
- You need to apply for purchase order financing. When you confirm that you cannot afford to buy the supplies necessary to complete your client’s order, you can then apply for purchase order financing. The lender will acclaim you for up to 100% depending on the required qualifications, your supplier’s reputation, and your client’s creditworthiness.
- Your supplier gets the payment. If you did not get through the 100% qualification of purchase order financing, you would have to make up any need by paying the supplier the difference by yourself. After this, the supplier would do the work needed to fulfill and complete the customer’s purchase order.
- The supplier delivers the goods and items to your clients through shipment. This is the easiest step because you won’t be doing anything.
- You invoice your client. Once the supplier delivers the items and goods to the client, they will then let you know of that. You then send the details of the invoice to the customer, if the client wants to pay overtime, the financer or lender may buy the invoice from you at a discount. This is considered to be factor lending or invoice factoring. This usually has a low fee but helps you to get your money faster.
- Your client pays the purchase order financing company. When your client pays their invoice, they would submit their money, not to you but the purchase order company. You will again be secondary for this step of purchase order financing. You’ll receive your cut of the profits faster depending on how fast your customer pays the lender.
- The purchase order financing company then forwards you your money. When the purchase order financing company receives and gets payment from your customer, they deduce their purchase order financing fee and charges. They then forward you with the remaining amount of money of the proceeds from the purchase order. Realistically, the purchase order financing rates will be like interest on your financing.
Advantages Of Purchase Order Financing
There are many advantages to purchase order financing. You must get all the information before you select your financing option. Some of the important advantages are as follows.
If your business and company struggle to buy the supplies and the resources you need to fulfill and complete an order placed by your client or you are facing a cash flow crisis, you should look into purchase order financing.
- It is very easy to qualify for purchase order financing. Business owners who are dealing with a hard time getting approval for a low or have poor credit score, purchase order financing is a good choice for them. They have less restrictive and very few requirements for loan approval than any other traditional banks. The purchase order acts as a guarantee to back your loan.
- You have to sign a personal guarantee when you take a normal business loan, which means that if the business is not able to pay back the loan, then the financer can seize your private items and values to get their money back. It’s a little different when it comes to purchasing order financing, they are non-recourse. This means that if your client is not able to pay for the goods, the lender or the financer faces the risk, you won’t be responsible in most cases. Even if the client is dissatisfied with the product, or refuses the shipment of the goods, or for other reasons that they don’t pay, the financer loses their money. But you should check the policies with the lender if the customer does not pay.
- Purchase order financing is great for startups. Startup owners usually have a difficult time getting proper funding because they don’t have a track record but they grow quickly. If the startup for any reason turns down even one client’s order, this can seriously affect and hamper the company’s development and growth prospects. Purchase order financing satisfies and pleases all your customers while holding up your cash flow.
- The funding is pretty flexible. Even though you are borrowing money, but technically purchase order financing is not a loan. You can deal with excellent purchase orders for funding when your cash flow decreases. Without worrying to pay back the money in installments, you can finance up to 100% of your costs in one sum. Purchase order financing is much more transaction-focused than a bank loan that you make a long-time commitment to paying back over many years in small installments.
Disadvantages Of Purchase Order Financing
Purchase order financing is not necessarily for everyone just like other forms of business financing and funding. You need to be sure and consider the disadvantages that come with purchase order financing. Some points are as follows:
The fees can be high sometimes. Purchase order financing is more affordable than short-term loans and cash advances. It is not the most expensive kind of business funding. But over time, the fees of the purchase order lending could add up and increase. Every month, providers charge 1.8%-6%. After the conversion to an APR (annual percentage rate), the purchase order financing run between the ranges of 20% and 75% APR. This then becomes very expensive than a bank loan.
- 100% financing is not guaranteed. You can get up to 100% financing for your supplier costs with purchase order financing, but practically, you will only receive 80%-90% in hand. The purchase order lender usually gives you only some of the costs, because there is a huge chance that your customer may not pay the bill. You will get the remaining money minus the financer and lender’s fees when your customer makes a complete payment for the goods.
- There are different requirements and qualifications for purchase order financing. There needs to be physical goods and products that the supplier would manufacture and deliver to your client. Purchase order financing is not available for companies and businesses that sell services. Invoice financing may be a better option for you if you provide services and invoice your customers for them.
- Purchase order financing is designed for businesses and companies that need fast, short-term access to cash. Customers usually in most cases pay for the products within 1-2 months, and the financing is up and down for you during that period. But if you would want to launch a new product or a new opening location and if you have a bigger business cost, then you’ll want to select a much more traditional loan.
- The other downside to purchasing order financing is that sometimes customers work with the lenders and the financers. The client or the customer pays the lender directly after the delivery of the products and goods. This means that your client would know that you are using some kind of funding and financing scheme, sometimes coloring the judgment of your business.
For Who Does Purchase Order Financing Work?
Businesses and companies that require and need to purchase supplies and resources to complete a customer order but cannot afford these supplies would benefit from purchase order factoring. Some of the examples are as follows:
- Startups are a project or company commenced by an entrepreneur to obtain and properly develop, approve a scalable business model. Purchase order financing is very beneficial for startups and small businesses that have a hard time maintaining large orders.
- Business owners who have a very low credit score and cash flow could benefit from purchasing order financing.
- Wholesalers are distributers who are wholesaling the sale of goods and commodities to retailers and exporters from industrial, institutional, commercial and other professional business users. In simple terms, it is the sale of goods and products to anyone other than a usual customer. They could use the purchase order financing for their benefits and growth.
- Resellers are an example of who could benefit from purchase order funding.
- Importers and exporters could use purchasing order financing.
- Outsource manufacturers could apply for purchase order financing. Outsource manufacturing is a process where they hire people outside of their company to form an entire product or completely build a product.
- Government contractors who are completing and fulfilling government orders and work.
One of the most important factors to know if your business qualifies for purchase order financing or not is whether or not you put up a complete product on sale. If you only sell materials and services, you would not qualify for purchase order financing. If businesses and companies are growing and developing faster than the cash coming in could benefit from purchase order financing, or businesses are dealing with seasonal spikes in sales and there is a tight cash flow that would qualify for purchase order financing.
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How To Find The Right Kind Of Purchase Order Financing Company?
There are many kinds of companies that you could work with if you need purchase order financing. Online companies and Microlenders both provide purchase order finance. It can be a difficult job to know which are the most effective and reputable. There are many questions you need to ask when interviewing the right purchase order company. Some questions are:
- What are the kinds of loans that you offer?
- How many clients and transactions have you handled in my particular industry?
- Do you have a team of professionals and specialists that work only on purchase order financing?
- How long have you been in the purchase order financing industry?
- When do you pay my suppliers? And do you pay them directly?
- How do you get all the funds?
- What’s the annual percentage rate on this financing?
- What will be my cost and fees for purchase order financing?
- How to you or I get the payment from my clients?
- What kind of credit check do you run on my business, my suppliers and my customers?
- What happens when my customers are unable to make the payment on time or refuse delivery of the products?
- Do you communicate with the clients at all?
Once you have all the information and all the answers to these questions, you could judge properly whether or not this is the correct purchase order financing company you would want to work with.
Alternatives For Purchase Order Financing
Purchase order factoring is unique in many ways; it is easy to qualify as long as you have reputable customers and suppliers. There is no risk to you directly in most of the cases if the clients refuse to pay for the products. Even if you feel purchase order financing is perfect for you, it’s better to know that you have other options before making any decisions.
Some other types of business financing are:
Short Term Loans and purchase order financing have a lot of similarities, but they are structured differently. The short term is an installment loan. You can pay back the money to the lender over several months, in weekly or daily installments. You could also pay staff, pay for advertisement, or other business activities with short term loans.
Business Credit Cards can be used to borrow a small amount of money. They are an affordable type of financing. The only disadvantage is that your credit limit might not be high enough to buy supplies for many orders.
Invoice Financing/Factoring is different from purchase order financing and is a loan based on invoices that you have sent to your clients. If you use invoice factoring, you will get the funds and the money from the lender directly. The cost is different too, Invoice factoring costs less than purchase order financing.