Especially for new companies and small businesses, cash shortages come with the territory. To ensure they have enough cash on hand, more and more companies are turning to more flexible forms of financing that provide the stability their business needs to grow, like purchase order financing. Purchase order financing is one of the more misunderstood products in the factoring industry. Essentially, it is designed for growing businesses that want to fulfill large orders.
If you are unfamiliar with this product and need a source of funding for your business, here is everything you need to know about purchase order financing:
The challenge of purchase orders
Receiving a large purchase order is good news for a growing small business. However, not every company has sufficient capital to fill every order – especially when there are multiple orders in question. The last thing any business owner wants to do is to turn away orders because they simply do not have adequate cash on hand. In addition to missing out on potential revenue and new customers, the inability to fulfill orders can also damage your business’ reputation. More and more suppliers that find themselves in tight cash situations are turning to purchase order financing.
What is purchase order financing?
Purchase order financing, also known as purchase order funding or PO financing, is funding you receive before delivering goods to your customers and prior to invoicing them. (If you have already delivered the goods and invoiced the customer, you need invoice factoring.) Essentially, this financing tool allows your business to secure an advance on your customers’ purchase order so you can cover your supplier costs. Your business can avoid depleting its cash reserves or declining an order because of cash flow issues. Ultimately, PO funding allows your business to accept high order volumes and quickly adjust funding to fulfill customer needs, so you can continue to grow your operations.
How does purchase order financing work?
Consider the all too common situation in which a customer places a large order that you quickly realize your business does not have enough cash on hand to fulfill. After reviewing your options, you ultimately decide purchase order financing might be the most ideal option. But how does the purchase order financing process work? Here is a closer look at purchase order financing, broken down step-by-step.
- The process begins when your customer submits a purchase order to you, detailing the type of volume of goods they would like to purchase.
- Your business then reaches out to your supplier to find out how much it will cost for the amount and type of goods requested by the customer.
- Once you receive their invoice, this is when you confirm whether you have enough cash on hand to fulfill the order. If you discover you do not have sufficient capital to purchase the necessary supplies to complete the order, you can then apply for purchase order funding.
- The purchase order financing company will then approve you for up to 100% of your supplier costs and will send those funds directly to your supplier. (If your business does not qualify for 100% purchase order funding, you will be responsible for paying the supplier the difference.)
- The supplier will then ship the goods directly to your customer.
- Once the goods have been delivered, the supplier will let your business know so you can invoice your customer.
- The customer will send their payment to the purchase order financing company, who will then deduct their fees and forward you the remaining sum.
Is purchase order funding right for your business?
If you are struggling to purchase the supplies your business needs to fulfill large or multiple orders due to cash flow restraints, purchase order financing could be the solution you are looking for. In addition to ensuring you can accept new client orders, purchase order financing is easy to qualify for. Purchase order lenders are more concerned with your customer’s payment history than yours, making it a good choice for business owners who are struggling to get approved for a loan due to a low credit score.
Who uses purchase order funding?
If your business sells a completed product and needs to buy supplies to fill a customer order, your business can qualify for purchase order financing. Startups, business owners with low credit scores, wholesalers, distributors and outsourced manufacturers are just a few of the business types that successfully use this cash solution. In addition, businesses that find themselves in the midst of cash flow problems – seasonal sales spikes, cyclical tight cash flow, growing faster than cash is coming in – can use PO funding to smooth the flow of their business.
Do you need extra cash to help you manage cash flow gaps, accept large or multiple orders and take advantage of growth opportunities? Would you like more information on how purchase order financing works, and how it can help your business grow? Contact our cash flow experts at Bold Business Capital to get started.
