PO Financing 101: What is Purchase Order Financing?

Around 82% of businesses fail due to challenges with their cash flow management. Growing businesses should know that PO financing is a solution to cash flow shortages.

A critical part of managing your cash flow is the cycle around bringing and fulfilling new business. If you struggle to fulfill new orders coming in, it can thin out your firm’s cash inflows. On the other hand, if you do fulfill new orders but can’t collect the revenue from them in good time, you suffocate your firm.

Purchase order financing is one way you can keep the money coming in by serving customer needs, even if you don’t have the cash at hand. Here is a compact guide to purchase order PO financing to get you started.

What is Purchase Order Financing?

PO financing is a type of credit that comes from a third party to help a business fund a customer’s purchase order.

When you receive a purchase order, it can be a good news, bad news situation. The good news is that new business has come through the door. But if you don’t have the liquidity to fund that order, that becomes the bad news.

So it would be best if you had a third party to front you the money you don’t have to fulfill your customer’s needs.

How You Can Use PO Financing

Let’s say your small business receives a significant order from a customer that your firm can’t afford to fulfill internally. You then approach a bank, but due to your less than stellar credit score, the traditional banker decides not to give you a business loan.

All the doors seem shut to you, right? Not so. PO financing companies can assist you in meeting such an order where a traditional banker balks at taking on the risk.

Once your customer makes an order, they will issue you the purchase order. The purchase order outlines all the details of the goods or service your customer requires.

Based on this purchase order, you then estimate the costs to determine if indeed, you can fulfill it. When it becomes clear that you can profitably meet the customer’s needs, the next step is to turn to a PO financing company.

Working With PO Financing Companies

Just as a traditional banker will weigh certain factors before granting you a business loan, so will PO financing companies. Some of the issues a lender considers are the creditworthiness of your customer, your supplier’s reputation, and your qualification requirements, among others.

Once the PO financing company gives you the green light, they then pay the funds directly to the supplier. While it’s possible to receive 100% financing, most PO financing companies tend to advance 80% to 90% of your order.

Your supplier can now deliver the materials you need to meet your customer’s needs. After delivering the service or product, you then invoice your customer.

When the customer pays the invoice, they will submit the funds not to you, but the PO financing company. After the lender receives the payment, they will deduct their lending fee and the principal amount before sending you the rest of the money.

When Does Purchase Order Financing Make Sense?

PO financing does not work for every type of business. Since it is a form of credit, you first need to figure out if your firm is best suited for it, as you will have to pay it back.

The funds from PO financing are best utilized to purchase supplies. Therefore, any business that needs first to procure its supplies and use them to develop and deliver a product to the customer fits nicely here.

A PO financing company will be more willing to front you the money in such a scenario, as there is less risk of you misusing it. It helps that a lender doesn’t pay the money directly to you, but your supplier, and also collects the payment from your customer.

In light of all this, you should approach PO financing as a means to an end and not a cushion for your cash flow. For the latter, a business line of credit would make more sense.

The Advantages of Working With a PO Financing Company

For the right kind of firm with the right type of business, there are tangible benefits of using PO financing. Here’s how such a form of credit can enhance your business.

1. Easier to Qualify For

If you have a low credit score that’s making it hard for traditional lenders to advance you money, PO financing lays an easier gauntlet for you. Such funding has fewer requirements for qualification, which are also less restrictive.

The purchase order often acts like the collateral backing your loan, bringing the finances within your reach.

A PO financing company is more concerned about your customer’s payment history than yours. So if you are still building your firm’s credit and have a customer with a good reputation, you can still qualify for the funds.

2. Flexible Financing

Although PO financing is money you obtain from a third party, it’s technically not a loan. So when your cash flow is not so robust, you can flip your purchase order for money without having to tie up your firm’s finances beyond specific orders.

Once things improve and your cash flow rebounds, you can go back to fulfilling orders in-house with no further outstanding commitments. Furthermore, in some cases, you can raise up to 100% with PO financing without pesky monthly payments waiting to hit your cash flow.

3. You Don’t Need a Personal Guarantee

When you secure a traditional business loan (or even investor funding), you typically have to offer a personal guarantee. With a personal guarantee, you are pledging personal assets in case the business can’t pay back the loan.

PO financing is structured such that if your customer is unable to pay for the goods or services you delivered, the lender will take the hit. You will not have to surrender personal assets to pay for the loan.

With that said, before you sign a PO financing agreement, it is wise to ask the lender about their policy on personal guarantees.

PO Financing Companies Help Increase Cash Flow

Cash flow is a glass ball that, once shattered, is hard to fix. One way your cash flow can suffer is when you can’t fulfill customer orders due to not having adequate cash in hand.

Purchase order financing is a kind of credit that helps you meet customer orders. This is accomplished despite your lack of financing to keep your revenue coming in and your cash flow robust.

Your FundingTree helps you access better rates and customer service from banks and industry-specific lenders. Apply today for the right business funding solution for your firm.