5 Things Purchase Order Financing Companies Consider
Interested in purchase order financing? If you’re looking for more information about PO financing for your business then you’re in the right place! In this post we’ll review 5 things purchase order financing companies consider when determining eligibility to finance your purchase orders.
PO Financing is a great tool for start ups and existing businesses. The underwriting for these types of transactions is very different than underwriting for traditional loans. PO Funding companies look at opportunities that are in the future, while traditional lenders look at past performance and balance sheet. If your business meets the below criteria, then apply today to see how much funding you can qualify for.
Follow along below to learn the basics to qualify for purchase order funding. If you are ready to get po funding set up for your business, you can APPLY HERE.
What is Purchase Order Financing?
Purchase order financing is a type of short-term funding that can help businesses with limited working capital to fulfill large orders. This type of financing is most widely used when small business loans or traditional business funding does not support the cash needs of a business owner.
A po financing company looks at open purchase orders to determine financing amounts. Unlike most online financing companies, invoice financing, and cash advance companies, this type of lender is looking at future opportunities.
How purchase order financing works?
The purchase order financing company approves the transaction and will pay suppliers costs directly to your vendor. This way you get the products you need to fill your customer’s order. Once you receive payment from your customer, you then repay the loan plus fees to the lender. In fact, since the customer pays the lender, the financing company deducts their fees and principle, and the remaining balance flows through to you.
What are the benefits of purchase order financing?
Purchase order financing pros and cons:
- Access to greater amounts of working capital to finance the production of inventory.
- You can now accept larger purchase orders from your customers.
- Taking on larger orders no longer interferes with your current working capital needs.
- There is a cost to purchase order financing. While it’s quite small, you still want to consider it in your pricing scheme to customers.
- Not all transactions will qualify for funding. The purchase order and customer must quality under the terms of your PO Funding programs.
- Customer visibility into your financial structure. Since most lenders will want to confirm orders, your customer will know you are working with a finance company. This can also be a benefit as your customer can feel confident that you can continually meet their needs.
The Creditworthiness of Your Customers
It’s important that your customers have a good credit history in order for you to be approved for PO financing. Purchase order finance companies will want to be sure that they will get paid back by your customers when they invoice them. Usually, companies will only approve PO financing if your customers have a credit profile that supports the order. This is typically demonstrated by a credit approval by an invoice factoring company.
Accounts receivable factoring is often an important part of the credit approval process. Many PO Funding companies will want there to be a factor set up ahead of time. Here are some benefits of pairing a factoring company with your purchase order financing partner.
- Credit approvals – Your invoice factor company will look at the credit profile of your customer to determine if they are approved for advances against the resulting AR. A non-recourse factor will also include credit insurance from a company like Allianz.
- Factoring advances – Financing a purchase order is usually more expensive than AR factoring. If your factoring company can advance against the AR and pay out the po funding company, you will save money. These advances operate as a line of credit against open AR.
- Professional collections – Factors know how to handle customer disputes and other issues in a professional manner. The payments will also be paid to the financing company directly.
- Learn more about the difference between non-recourse and recourse factoring HERE.
Purchase order financing vs factoring
Your Company’s Overall Financial Health
Purchase order financing companies look for companies that are able to demonstrate overall good financial health. While this typically doesn’t mean that your business must have great credit, it does mean that your business must have a healthy cash flow and low levels of debt. If there is debt on your company, you will be required to have that debt subordinated in favor of the purchase order funding lender. This makes sure there are no competing liens on the products that are financed by the po funding company.
The Amount of the Purchase Order
Of course, the amount of the purchase order itself will be a factor that purchase order financing companies consider. The larger the purchase order, the more risk involved for the financing company. As such, you may only be able to finance a portion of a large purchase order.
Most PO Funding companies will finance up to 100% of your cost of goods. However, some are set up for smaller transactions ($25,000 – $2,000,000) while others are more focused on larger transactions ($1,000,000 – $20,000,000). Speak with your lender in advance to make sure they are comfortable with the size transactions you are working on.
The Type of Product or Service Being Ordered
The type of product or service being ordered is also be a factor that purchase order financing companies consider. Some products and services are considered to be higher risk than others. For example, PO financing companies may be hesitant to finance the purchase of commodities due to the volatile nature of commodity prices and more likely to finance the purchase of products with a long shelf life.
WIP(PO) Funding vs Finished Goods (PO) Funding
WIP (Work In Progress) is where the process to build or produce inventory involves purchase multiple components and assembly. Finished Goods Funding only requires the purchase of a single ready for resale product. Most lenders will only consider financing finished products. Work In Progress can carry too much performance risk for a lender to get comfortable with.
The Reputation of Your Supplier
Finally, the reputation of your supplier can also be a factor that purchase order financing companies consider. Companies will want to be sure that your supplier is reputable and has a good track record of delivering on their orders. They’ll also want to be sure that your supplier is financially stable and able to continue supplying you with the products or services you need.
The good news is that this type of financing is relatively easy to set up for your company. If you’re interested in learning more about purchase order financing, be sure to check out our website or give us a call today! We would be happy to answer any questions you have.
If you are ready to get started today, you can APPLY HERE.
Purchase Order Financing FAQ
What do you need for po financing?
Similar to traditional financing a lender will want to review your financial statements, the open purchase order, and a description of supplier costs.
How much does purchase order financing cost?
This type of funding should cost between 2 and 3% of funds needed per 30 day period to fund purchase orders. While more expensive than a traditional business loan from a financial institution, you can often receive larger amounts of capital.
What are purchase order financing rates?
A po financing company charges between 2 and 3% per 30 days.
How does Government purchase order financing work?
Govt PO Funding works just like traditional PO Funding. The financing company pays your supplier for products that are then delivered to your government customer.
How do I find the best purchase order financing companies?
There is a small handful of lenders that offer this type of financing. Star Funding is one of the oldest and most well known lenders in the industry.
What does a purchase order financing agreement look like?
Under a purchase order financing agreement, the lender pays for goods and then collects payments directly from customers.
Will purchase order financing interfere with supplier relationships?
When done correctly, there should be no interference with any parties involved. Vendors are paid, customer receives the product, and you no longer have cash flow problems trying to fulfill customer orders.