Purchase order financing
Cash flow is a common problem that exists among many businesses. If a company lands large customer purchase orders but doesn’t have the funds to fulfill the order, the impact can be staggering. Often times, successful businesses turn to purchase order financing companies to help support business growth.
Some online financing companies claim to offer purchase order financing, but they do not. They might call it PO Funding, but it’s simply a credit line. If you would like to know why purchase order financing is helpful, pay attention to the below guide to learn everything you need to know.
Everything You Need To Know About Purchase Order Funding(purchase order financing)
Purchase Order Funding (also known as Purchase Order Financing) is a lower-risk business loan option than traditional financing. Cash-strapped businesses receive financing when they need to finance growth quickly. It is a transaction specific type of funding to help purchase goods for companies with cash flow problems. Therefore, it is not always such a great fit for service based businesses.
PO Finance Meaning: This is when purchase order financing companies finance the production or acquisition of a product for resale. This helps a company deliver product to a credit worthy customer. Many people turn to this business financing option to avoid short-term high interest cash flow loans. Unlike a term loan, this type of financing tools is specific to an individual transaction and outstanding customer orders.
There are a lot of small business financing options in the market today. While some are more expensive than others, purchase order financing is less expensive than most. PO Financing companies are usually easier to work with than a traditional financial institution like a bank or credit union. Continue reading below for a thorough purchase order financing explanation.
Purchase Order Financing Can Help:
PO Funding is a finance option that allows companies to fill a large customer’s purchase orders and avoid the risk of losing business. What’s better is that it’s unlike a traditional business loans or bank loan where financing depends on the credit of a company. With PO financing, funding hinges on the creditworthiness of the customer placing the order. Therefore, it is a great option for those companies who have a strong track record of on-time customer payments.
Purchase Order Financing is important?
Losing out on larger orders due to lack of funds can have major negative impacts on a small business. It can prevent a small business owner from achieving their goals, or even paying their bills on time. Advance planning is important to make sure purchase order financing is ready to go when it is needed. Once it is set up, a po financing company will act like a line of credit to draw from as needed.
Entrepreneurs work too hard to lose orders and revenue due to lack of cash flow. In addition, you risk putting your customer relationship on the line. Those who depend on you might think twice next time they need to place a purchase order. Additionally, if word spreads throughout your organizations that you’re not able to fund orders, it may put a strain on employee relationships.
Who does PO Funding help?
PO financing is a good option that can help qualified businesses and business owners that need money. Like many other businesses, you may need extra liquid capital when growth outpaces available funds, or when funding from existing sources are insufficient. It’s not strange to think that your businesses financial situation may require extra capital at some point so you won’t turn customers away.
Companies like manufactures and importers who receive regular customer purchase are a great fit for financing p o. With purchase order financing and invoice factoring entrepreneurs and businesses are able to focus on running their business. Without the correct financing in place a business owner would worry about financing their daily cashflow needs instead.
Additionally, STAR Funding, a New York, NY based purchase order financing company, permits companies to bid for larger contracts by providing up to 100% funding for a transaction.
Most finance companies will only fund purchase orders for finished products. STAR will consider both finished goods and work in process. STAR Funding offers liquidity, acceleration of cash flow and safety for your growing business needs. Your mind will be at ease when customer POs can be filled each and every time throughout the fiscal year.
Top industries served by purchase order financing companies
- Food Businesses
- Apparel Companies
- Consumer Electronics
- Start Ups
- And many more medium and small businesses!
Some industries that don’t qualify:
- Gun PO Funding or Ammo PO Funding – And other items that require licenses or certifications in order to purchase.
- PO Funding for food products with short shelf lives.
How does Purchase Order Financing work?
After you receive a purchase order from your customer STAR will begin to arrange adequate liquid capital to cover supplier’s costs. Your purchase order financing company will cover the supplier costs of up to 100% of your cost of goods.
These goods must be pre sold to credit worthy end customers. If necessary, duties, freight, and other expenses are also paid for. Important to note, it’s not a purchase order loan where your business receives the funding directly. The financing company directly pays your supplier in most situations.
After goods are delivered to your customer. You invoice the customer and then the customer pays the invoice factoring or financing company.
PO Financing Examples
Purchase order lending is a very straightforward concept to support a company’s finances. To help you understand how it works, here is a an example of how we can finance a customer’s purchase order.
- Client(borrower) presents products to a credit approved customer.
- Client receives a non-cancellable purchase order from a customer.
- Client secures a pro-forma invoice from supplier.
- STAR Funding verifies the customer purchase order and supplier details.
- STAR provides letter of credit to the factory, or STAR advances funds(through international wire transfers) against finished product after a final inspection of the product. Covering up to 100% of the supplier’s costs
- Supplier sends product to a warehouse(typically a 3rd party warehouse) or directly to the customer.
- Client invoices customer after customer receives the product.
- STAR approves the invoice for invoice factoring(STAR offers non-recourse factoring) and provides advance payment.
- STAR is repaid the principle plus purchase order financing cost from the initial STAR advance.
- Customer pays the invoice directly to the factoring lock box.
- Balance of funds are given to the client.
Purchase Order Financing Rates
PO financing rates depend on a number of factors. Are you financing finished goods or Work In Process(WIP)? What is the length of the transaction? What is the exposure your Purchase order finance company is providing for the transaction? The fees are usually straight forward and often a simple flat fee for a certain time period. For example, the financing company charges 1% per 15 day period on the funds needed.
The math to determine a purchase order finance rate is simple. Multiply the fee times months or days outstanding(don’t worry about the annual percentage rates) and that will give you the cost of funding your transaction. Typical po financing rates are a flat fee that ranges from 1.5-4% per 30 day period. When dealing with larger transactions and better lenders you will receive more favorable rates. A lender may also offer 10 day or per day rates. Weekly or daily rates are preferred because they make sure you are only paying for what you need as sell products.
Do I need an invoice factoring company?
Typically the purchase order financing company will require an invoice financing company on the back end to finance unpaid invoices. The po financing companies are usually paid out by the invoice factoring advance when the goods deliver to the end buyer. In the end, the customer pays the factor(lower cost of capital) to complete the transaction. Once the customers pay, the factor will advance the remaining balance.
Many small business owners already have receivables factoring in place. This makes it much easier for PO financing companies to engage. If a factor is already in place, they are also familiar with the accounts receivable and lending decisions. This helps you get the cash you need without any additional fees.
Purchase order financing works with asset based lenders also. When an asset based lender is present they will advance against their borrowing base or credit line. This is how you pay back the po finance company. Similar to a factor, they too receive payment from the customer into their lockbox or controlled account. Make sure to look at your po financing agreement to see what is required here.
Is PO Financing Secured?
Yes. Most PO Financing companies will want to be considered a secured creditor. When other lenders are present there will be an inter-creditor agreement to determine which lender is secured by which assets. Having a security interest makes sure no other creditors can get in the way of successful deliveries or customer payments.
For example, you can’t qualify for po funding when you have an existing secured cash advance. Equipment financing, trade payables, and small business loans are allowed as long as they are unsecured.
This security process is specific to the US. Purchase order financing in Mexico or Dubai may work differently regarding the security interest. In the event there is an outstanding secured loan from a bank or the SBA(Small Business Administration), we will require an inter-creditor agreement or subordination to be put in place.
How do I qualify?
One of the best features of this type of funding is that the purchase order financing company does not rely on your business credit or financial statements. The business lenders in this situation look at the invoice amount and creditworthiness of your end customers. Since the finance company is paying for the goods, they rely on the customer’s ability to pay the invoice after products are delivered. This allows a small business to compete with much larger corporations regardless of their customer’s demand and current balance sheet.
Some lenders will require a personal guarantee to protect against fraud and mismanagement. However, your guarantee or credit history has little to no effect on determining credit limits. The only caveat to this is if you have bad credit due to questionable business management, it may turn off the lender even if you have solid purchase orders.
There are a lot of growing businesses that require funding and business loan solutions in the market. Purchase Order Financing fills the need of one of them. There is no better solution for a business to fund a large purchase order to meet customer demands. A purchase order financing agreement with the right partner provides more than enough working capital to pay your suppliers. With purchase order financing you meet customer demands and fill customer purchase orders every time.
Still not convinced? Contact a Star representative today and review purchase order financing examples to learn more about the process.
Purchase order financing is available all over the world. It doesn’t matter if you are seeking financing for po funding Mexican companies, or looking for Chicago purchase order funding. There are solutions out there regardless of where your small businesses are located. To learn more about Mexico purchase order finance reach out to a representative today.
Start Purchase Order Financing
Applying for Purchase Order Funding is simple. Contact us today and we’ll conduct a quick review of your current or projected transactions. Whether you need it now or are planning for the next time your customer places an order, it’s never too early to have purchase order financing lenders in place. Follow the below steps to receive financing.
- Contact STAR today to speak with a funding representative to begin the application process or apply online
- Upload requested business documents for due diligence
- Upload purchase orders from customers and invoice from suppliers
- Sign funding agreements
- Work with a STAR Funding representative to complete the funding of your first purchase orders.
PO Finance Definition
Purchase order finance definition – A type of funding where a lender supports the purchase or acquisition of goods or services to help a borrower fill a purchase order they have received from their customer.
Just because a company has a purchase order outstanding to their vendor, does not mean a lender will help facilitate the purchase. The borrower needs to have goods or services pre-sold to their customer. Once all terms of the proposed po funding transaction are confirmed the lender will request payment instructions and prepare the vendor for bill payments.
About STAR Funding
For over 21 years, STAR Funding has been the top purchase order financing company providing small business funding to entrepreneurs to continue growing and operating their businesses. STAR will evaluate your customer’s creditworthiness and not your business credit to provide quick and affordable financing to help you grow your business.
Don’t wait to learn more about the purchase order financing advantages your company can benefit from. It is just the solution you have been looking for to fuel your small businesses growth when you don’t have the working capital needed to fill large customer orders.