Have you ever declined an order from a customer because you couldn't pay your suppliers for the goods? Cash flow shortages that keep your business from securing big orders are frustrating and stand in the way of company growth. Luckily, there is a short-term business financing option that can help you secure the funds to pay suppliers and manufacturers before fulfilling your order and invoicing the customer.
Purchase order financing is a great choice for those who sell tangible products for non-consignable and non-cancellable sales.
But what is purchase order financing, and how does it work? We thought you’d never ask.
The Purchase Order Financing Process
The purchase order or PO financing process has seven steps.
- You submit a purchase order financing application.
The first step in the process is making sure you are eligible for this type of financing.
You can contact your supplier to determine the cost to complete the order, then apply for purchasing order financing with a reputable lender. In the application, you will typically provide information about your business, your customer, the supplier, and the goods you produce.
- The lender determines if you qualify.
One perk of PO financing is that approval is based on your customer's credit history, not yours. You can qualify for financing if your customers have a history of paying on time.
PO lenders consider your supplier's reputation and track record, as well as your time in business and annual revenue.
Some lenders only finance certain types of products or require a minimum transaction amount. You should be able to review eligibility requirements on the lender’s website or by contacting a representative, as each lender has its own list of criteria.
- After approval, you send the supplier’s pro forma invoice to the lender.
If the lender determines that you are eligible for PO financing, ask the supplier for a pro forma invoice showing an itemized list of parts, goods, and costs. It serves as a cost estimate that you can then send to the lender.
- The lender advances a portion of the purchase order value to the supplier.
The lender pays the supplier a percentage of the purchase order value directly. The advance may be through a line of credit or another method that guarantees payment will be made once conditions are met, such as proof of shipping.
- Once the order is complete, you send the invoice to both your customer and the lender.
Once you receive notification of shipment, you invoice the customer and send a copy of the invoice to the purchase order financing lender.
- The lender collects payment from your customer.
Instead of paying you, your customer directly pays the PO financing lender the total price of the invoice.
- The lender pays you the remaining balance.
The lender receives the payment from your customer, deducts its fees, and transfers the balance to you.
Take a more in-depth look at the financing process here.
This process allows you to assure the supplier you are good for payment, so your customer’s order is fulfilled and you don’t have to pass on an unusually large order. You get access to working capital before completing an order.
Purchase Order Financing vs. Invoice Factoring
When searching for business funding, you may have seen the terms purchase order financing and invoice factoring. These two options are not the same thing.
With PO financing, you can quickly access working capital to cover manufacturing or purchasing costs for tangible goods pre-sold through a purchase order that have not yet been produced.
Invoice factoring is the process of a business selling its invoices or accounts receivable to a factor for a percentage of the invoice value. The process happens after the product is produced and sold, while you are awaiting customer payment.
PO financing is unavailable for service-based companies because lenders will only pay for physical products. Invoice factoring does work for service-based companies, as long as the company issues invoices to their customers.
If you can’t complete a customer order without funding assistance, PO financing is the way to go. The process is simple when you work with a lender you can trust.
Choosing a PO Financing Company
If you’re interested in PO financing, it’s important to choose a lender that has your best interest in mind. Base your lender selection on their experience, the financing process, and how much the lender charges in fees and other requirements.
Ask how often the company handles PO financing agreements and whether it has experience in your industry. Look for lenders that have been in business for a while.
Ask the following questions to learn about the company’s financing process:
- Do I need to meet a minimum funding amount?
- How do you pay suppliers?
- How do you accept or receive payment from customers?
- Will you contact my customers directly, and how?
- What happens if my customer fails to pay?
- How quickly will I receive funds?
Make sure to get an explanation of the typical fees and how they break down. Determine the percentage of supplier costs the company offers as the initial advance and whether the lender requires a personal guarantee.
Once everything is settled to your satisfaction, apply for PO financing and build a relationship with your lender of choice.
Contact Factor Funding
PO financing is faster and easier than applying for a traditional bank loan. Eligibility relies on your customers’ creditworthiness, not yours. PO financing can help grow your business and allows you to take orders you couldn’t otherwise fulfill.
If you want to learn more or apply for purchase order financing, contact Factor Funding.
