Purchase Order Financing


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When your business is growing but your cash flow is lacking…

  • How do you fulfill purchase orders if you can’t pay suppliers?
  • How do you grow and maintain your customer base if you can’t handle the sales volume?

The answer is Purchase Order Financing, a funding solution for large orders that you can’t afford—so that you don’t have to turn down customers!

What is Purchase Order Financing?

Purchase Order Financing (or PO Financing) is the use of a third party to pay your supplier so that you can fulfill a customer order. In this situation, you are the vendor with your supplier and your customer. The third party is the PO financing company.

Let’s imagine your customer places a large order for goods that you don’t have in stock. You’re thrilled to have the business, but sadly you don’t have the money to pay your supplier for the goods. Rather than turning away your customer, you can arrange for a PO financing company to pay your supplier. This allows you to complete the sale and delivery of goods to your customer. Your customer then pays the PO financing company, who takes the money they paid to the supplier—plus fees for their service—and sends you the difference.

When you consider the alternative—turning away customers and watching them run to competitors—PO financing can be a lifesaver for your business! Especially if you’re a young business or startup.

What kind of companies should use Purchase Order Financing?

PO financing is not for all types of business. Rather, it is useful for B2B businesses—short on cash flow—in the following sectors:

  • Distributing
  • Reselling
  • Wholesaling
  • Manufacturing
  • Importing/Exporting
  • Government Contracting

How Does Purchase Order Financing Work?

Purchase Order Financing is a multi-step process involving four parties. Here’s what you can expect to happen:


Your customer places a large order.


You ask the supplier for an estimate. They send you an invoice, which makes you realize you can’t afford the supplies.


You contact a purchase order financing company, seeking the full amount of the supplier cost. The PO financing company agrees to cover the whole amount, or offers at least 80-90%, and informs you of the monthly fees.


The PO financing company sends money to your supplier. If they don’t cover the entire invoice, you’ll have to pay the difference.


You or the supplier (depending on the arrangement) sends the goods to the customer.


You invoice the customer, typically requiring payment due within 60-90 days.


Your customer pays the PO financing company (not you). The faster the customer pays, the less the PO financing company will collect in fees… and the sooner you’ll see your profits.


The PO financing company deducts fees plus the original advance from the customer payment, and then forwards you the difference.

Keep in mind, purchase order financing is technically not a loan. You’re not taking debt to finance a sale. Rather, you’re forfeiting a small portion of the profit to finance the sale.

Why Use Purchase Order Financing?

You worked hard to get your business off the ground. And it shows! Customers are now ordering from your company in bulk. Perhaps you’re getting bombarded with a bunch of orders all at once. This should be a sign of encouragement—not doom!

With a little help from PO financing, you can bridge the cash flow gap when your inventory can’t keep up with demand. Here are several advantages, and a few disadvantages of using purchase order financing:

Pros

You don’t have to turn away existing or new customers!

Easier to Qualify. You don’t need perfect a credit score. (unlike lenders, PO financing companies care more about your customer’s creditworthiness)

No Personal Guarantee (PO financing is usually non-recourse, meaning PO financing companies absorb the risk of customer delinquency)

Great for Startups and Small Businesses who are on the upswing, but still short on cash flow

Not a Long-Term commitment (costs of PO financing are specific to transactions, not terms)

Cons

Fees can be high (when converted to APR, annual percentage rate, not as affordable as bank loans)

Only for B2B companies that sell finished goods. Not available to B2C companies or businesses that offer services, product parts, raw materials.

Short-term funding Only (those seeking long-term financing are better off seeking business loans or lines of credit)

Customers know you’re using financing because they’re sending payments to the PO financing company.

P.O. Finance Rates, Terms and Fees

As mentioned, sometimes it’s possible that the PO financing company will fund 100% of the supplier cost. More realistically, they will offer a maximum of only 70-90%, slightly reducing their risk by forcing you to cover a small portion of the cost. If you’re able to cover that 10-30%, this may even be a better deal, as you’re paying fees on a smaller advance.

Most PO financing companies will require an order of at least $20,000 to make financing it worth their efforts and risk. Maximum amounts will vary based on the size and financial health of your business, your supplier, and your customer.

The cost structure of most PO financing is straightforward. You’ll pay a percentage of the total advance for each month after the invoice is sent to the customer. Expect rates between 1.8-6%. If the PO financing company paid your supplier $50,000 and your rate is 3%, you’ll pay $1,500 for each month it takes your customer to pay. If it takes 60 days, you’ll pay $3,000. If it takes 90 days, you’ll pay $4,500. Alternatively, PO financing companies may charge a higher percentage for the first 30 days, with lower percentages for subsequent months. For example, you could owe 6% for the first month, and then 2.5% for every month it takes the customer to pay after that.

1.8-6%

Monthly Rates

$20k+

Credit Limits

70-90%

% of Order Funded

1-2 w

Funding Speed

Once you’re approved, funding takes about 1-2 weeks. PO financing companies need to assess your business, your supplier, and your customer. Therefore, funding takes longer than it would for short-term loans or invoice factoring, where fewer parties are involved.

How to Qualify for Purchase Order Finance?

PO financing is uniquely designed for B2B or B2G companies who sell finished goods. If you don’t fit this description, you may be better off with business loans, lines of credit, or merchant cash advances.


Also note that PO financing only provides funding before the delivery of goods. If your business needs funding while awaiting customer payment after the delivery of goods, consider invoice factoring.

The value of the purchase order should be at least $20,000, but some PO financing companies prefer to see a value above $50,000. The expected profit margin on the sale should be at least 15%, if not more, and the transaction must be non-cancelable.

In addition to the details of your business and the purchase order, PO financing companies will evaluate your customer’s payment history and credit score. They will also check to see that your supplier is reputable, with a history of timely and satisfactory orders.

Is Purchase Order Financing the answer to your cash flow crunch? Call Gateway today! We’ll help you find the most affordable and timely solutions to fulfilling your customers’ orders.