Purchase Order Financing is a type of business financing in which a company uses its purchase orders as collateral to secure funding. This can be used to finance the cost of goods sold, order inventory, or pay suppliers. Are you considering using PO funding for your business? You’re in the right place! Discover our comprehensive guide to purchase order financing for businesses.
Purchase Order Financing: What is It?
Purchase order financing is a type of business financing in which a company uses its purchase orders as collateral to secure funding. This can be used to finance the cost of goods sold, order inventory, or pay suppliers. PO financing can be especially helpful for:
- Businesses that have difficulty securing traditional financing, such as small businesses or startups.
- Businesses that have a large number of purchase orders but need financing to fulfill them.
If you’re considering purchase order financing for your business then you need to know how it works.
How Does Purchase Order Financing Work?
When a business applies for purchase order financing, the lender will review the business’s purchase orders and commit to providing funding for a portion of the total value of the orders. The business will then use this funding to pay its suppliers and ship the products to the customer. Once the products are delivered, the customer will pay the business, and the business will repay the loan plus any fees and interest charged by the lender.
Now that you know how purchase order financing works, let’s take a look at some of the pros and cons of this type of financing.
Pros and Cons of Purchase Order Financing
There are several advantages and disadvantages to consider when deciding if purchase order financing is right for your business.
- Quick access to capital – you can access funding quickly to take advantage of opportunities as they arise.
- Cover business expenses – you can use the financing to cover a wide range of business expenses, such as inventory, supplier costs, and shipping costs.
- You don’t need good credit – because the financing is secured by your purchase orders, you don’t need to have good credit to qualify.
- You may need to provide collateral – while you don’t need to provide personal collateral, you may need to put up business assets, such as receivables or inventory, to secure the financing if the purchase order doesn’t cover your financing needs.
- The fees can be high – lenders will charge fees for providing purchase order financing, which can include an upfront fee, a monthly fee, and/or a percentage of the total loan amount. Also, interest rates on purchase order loans are typically higher than traditional business loans.
- You may need to have strong financials – while not required, it will help your funding amount and terms if your business has strong financials.
Now that you know the pros and cons, let’s take a look at the process of securing purchase order financing for your business.
The Process of Securing Purchase Order Financing
If you’re interested in securing purchase order financing for your business, there are a few things you need to do:
As we mentioned before, your business will need to prove that it’s eligible for purchase order financing. This usually includes having a strong financial position, a good track record of sales, and a large number of purchase orders.
Select a Lender
Once you’ve determined that your business is eligible, you’ll need to select a lender. There are many lenders that offer purchase order financing, so it’s important to compare options and select the one that’s right for your business.
Submit an Application
After you’ve selected a lender, you’ll need to submit an application. The application will include information about your business, your purchase orders, and your financials.
Review & Sign the Funding Agreement
If your application is approved, you’ll need to review and sign the funding agreement. This agreement will outline the terms of the loan, including the repayment schedule, interest rate, and fees.
Once you’ve signed the funding agreement, the lender will provide funding to your business. This funding can be used to pay your suppliers and ship the products to your customers.
As you can see, the process of securing purchase order financing is relatively simple. However, it’s important to remember that this type of financing is not right for every business. Be sure to carefully consider the pros and cons before deciding if purchase order financing is right for you.