How Purchase Order Financing Rates Work

Posted by Factor Funding Co. on November 17, 2016

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One financing method that has recently gained popularity with product wholesalers and re-sellers is purchase order (PO) financing. PO financing has numerous benefits for sellers who have large purchase orders and lack working capital. When a business chooses PO financing, it will receive the funds needed to fill single or multiple customer orders right away. PO financing can save businesses struggling to fulfill purchase orders due to a lack of cash.

When to Choose PO Financing

When a business receives an order for a product, it uses its resources to fill the order. Sometimes, a business may lack the money to acquire the materials to fill an order, finding itself in a tough position. In these situations, businesses can trust PO financing companies for short-term financing. PO financing will give the company the capital it needs to fulfill an order and retain the customer. If you’re unsure whether PO financing is right for your company, ask yourself these questions:

  • Does my transaction qualify? PO financing companies tend to accept only straight resale transactions for pre-sold goods or services. The purchase order must have a profit margin of at least 20% and be non-cancelable. The PO must also not be for consignment/guaranteed sale. Most companies only handle transactions of a minimum size.
  • Do my customers qualify? A company won’t just look at your purchase order – it will also look at the creditworthiness of your customers. The company will agree to fund the transaction based on the probability of your customers paying for the order in a timely manner.
  • Does my company qualify? The company will perform due diligence in deciding if you’re a good candidate by investigating your company’s financial statements and other information to ensure you’ll fulfill the order once you receive funding. The company will also look at your suppliers to ensure that they’ll deliver the product you require.

Once you decide PO financing is right for you, it’s time to look at the financing company to determine if the value is worth more than the cost of the service. This requires looking at a company’s rates, finding out what percentage of financing you qualify for, and comparing the costs of PO financing with what will happen if you can’t fulfill your customers’ orders.

How Much Will PO Financing Cost?

While PO financing is an important tool for many businesses, it’s typically costlier than traditional financing. PO financing is an advance that will cover most or all the costs of supplies. In return for this service, the financing company charges the business certain fees. The PO financing company will take these fees from the collected invoice and give the remaining money to the business in need. In some PO financing scenarios, the financing company will open a line of credit with the supplier. That way, the business in need can get the supplies, even with poor credit or few assets.

The ultimate cost of PO financing will depend on the company and the terms of the advance. PO financing rates work based on utilized funds. Utilized funds are the outstanding funds you need to pay your supplier. If you owe your supplier $50,000, for example, the PO financing company will base your rates on $50,000. On average, PO financing rates run 3% per 30 days on the utilized funds. Most companies charge based on a rate model such as 2% per 20 days and 1% per 10 days thereafter, or 3% for the first 30 days and 0.1% per day thereafter. Rates may be higher or lower, based on the transaction.

Select a PO financing company based on its industry experience and capital sources as well as the transaction flexibility, costs, and minimums. The right company for your competitors may not be right for you. Choose a business based on your individual financial needs, purchase orders, and customers.

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