Have you ever heard of purchase order financing (PO financing)? If you’re a reseller, wholesaler, or distributor, chances are, you’ve already heard of this financing program.
Purchase order financing can give you the capital you need to complete customer orders if you’re unable to complete orders placed by your customers. However, it’s important to know that PO financing is not a loan, but rather an advance of the money due to you. Since it isn’t a loan, you don’t need high credit scores. This financing option leverages the credit of your buyers and the reputation of your suppliers.
How PO Financing Works
Here’s how purchase order financing works:
- You receive orders from your customers. Once they submit the purchase order, they must indicate the type and quantity of what they want to purchase from you.
- You forward the purchase order to your suppliers. In turn, they will most likely send you an invoice for the goods.
- Apply for PO financing. Once you realize that you don’t have the funds to fulfill customer orders, you can apply for purchase order financing. Lenders typically provide up to 80% to 90% of the total cost of your suppliers. However, there are lending companies who are willing to fund up to 100% depending on the credit rating of your customers and the reliability of your suppliers.
- The PO financing company you’re working with will pay your suppliers. Once approved, the lender will immediately pay your suppliers so they will start working on your customer’s order.
- The orders are delivered to your customers.
- You will send an invoice to your customers. You can send an invoice to your customers once they’ve received the goods.
- Your customers will pay directly to the PO financing company. With purchase order financing, your customers will pay their dues to the lending company you’re working with. The lender will subtract the amount you borrowed from them and charge a small transaction fee before giving you your profit.
To qualify for purchase order financing, most lenders require the following:
- Good credit scores from suppliers and customers.
- Profit margins of at least 15%.
- Only sells tangible goods.
- B2B companies only.
Keep in mind that the requirements vary from lender to lender. Make sure to ask the terms before committing.
To help you understand purchase order financing, here’s an example transaction.
For example, your customer placed a $10,000 purchase order. Your supplier cost for this order is at $9,000 and you have to pay your supplier before you can ship the goods to your customer. Unfortunately, you don’t have $9,000 upfront to complete the purchase. A PO financing company steps in to help you fund the transaction.
The financing company will advance you the $9,000 if the transaction meets their specific requirements. Once they pay your supplier, the supplier will ship the products to your customers. You invoice the customer and the customer will pay the financing company. The financing company will give you the money minus the transaction fee and the money advanced to you.
The Benefits of PO Financing
There are many advantages of purchase order financing, such as:
1. You can take on larger orders.
As mentioned, purchase order financing lets you take on larger orders that you would otherwise turn down due to financial limitations. When used properly, you can use this financing program to grow your company.
2. It grows with your business.
Unlike other financing options, purchase order financing as no ceiling limit. The amount of money financing companies can extend to you depends on the ability of your suppliers, the size of your orders, the reputation of your buyers, and your business’ capacity to execute it.
3. It’s easy to qualify for.
You have a greater chance of qualifying for a purchase order financing than you do with a traditional loan. There’s no secret that small businesses have a hard time qualifying for business loans from traditional lenders. But with purchase order financing, you can easily qualify for funding! However, you need to have solid buyers, good products, and reputable suppliers. Additionally, your company also needs to be profitable.
Learn More About PO Financing Today!
Purchase order financing comes in handy for retailers and wholesalers. You don’t have to turn downs customers because you don’t have the funds to fulfill their orders!