Purchase order financing (PO financing) is a funding solution for businesses that lack the working capital needed to fulfill customer orders. The financing company will give you the money you need upfront to pay your supplier to manufacture the goods and deliver them to your customer. Your customer will then pay their purchase order directly to the PO financing company rather than to you. The PO financing will deduct their fees before sending the rest of the money to you.
Small businesses with insufficient working capital to complete purchase orders are the ones that benefit the most from purchase order financing. For instance, startup companies that get a bunch of orders at once may not have enough working capital to purchase raw materials to complete customer orders. However, turning customers away can be bad for business. Purchase order financing gives you the resources you need to cater to all your customers.
Before you know the qualifications for PO financing, make sure you’re familiar with the terms used in this type of financing.
- Customer: Your customer; the person or company who has you the purchase order for your goods.
- Supplier: The one responsible for manufacturing and distributing your products.
- Purchase Order Financing Company: The lending company that gives you upfront working capital.
- Seller (You): The business owner; the one seeking funding to fulfill customer orders.
By knowing the stakeholders of a purchase order financing agreement, it’ll be easier for you to determine which proposal is the most suitable for your company.
Qualifying for Purchase Order Financing
Did you know that you have a better chance of qualifying if you apply for purchase order financing than traditional loans? However, this convenience doesn’t guarantee approval. Just like conventional funding solutions, you still need to meet certain requirements to qualify for PO financing. Lending companies will conduct due diligence to evaluate your transaction and see if it qualifies for funding.
To avoid wasting time and money, make sure that your business is eligible for PO financing. Here are six frequently asked questions regarding the qualification requirements of purchase order financing.
1. Is my transaction Eligible?
Purchase order financing requires that the transactions you’re looking to fund are a resale transaction. Your company must purchase your products from a reliable supplier and sell them to your customers without alterations, except for the brand label and packaging.
Lenders have specific requirements on the type of transactions they want to finance. Generally, it should have the following:
- Non-Cancelable Purchase Orders
- Not for Guaranteed or Consignment Sale
- A Minimum Value of $20,000
- A Gross profit margin of at least 20%
2. Are my customers eligible?
Purchase order financing is a great funding option for startup companies and small businesses because lenders are more concerned about your customers’ creditworthiness rather than yours. PO financing companies approve your transaction based on your customers’ ability to pay for their orders on time. They will conduct due diligence of the creditworthiness of your customers before you can qualify.
3. Is my supplier eligible?
The reliability of your supplier also bears the same weight as the creditworthiness of your customers in qualifying for PO financing. Lenders will review your suppliers to make sure that they’re capable of supplying the products you’re asking for. To save time, you should conduct your supplier and customer due diligence before applying for PO financing. If your supplier has financial problems, like needing prepayment to supply you the goods, there’s a great chance that they will not qualify.
4. Is my company eligible?
PO financing companies will also evaluate your company to see if you can fulfill the order once you receive funding. Lenders usually review financial statements, public records, and more. Startup companies can qualify for purchase order financing as long as they have personally invested in their company.
5. Am I eligible to apply for PO financing?
Lenders will also check your background and reputation before they grant funding. Most lenders believe that a small company is only as effective as its owners. Business owners must have sufficient industry experience and should be free of legal problems that could affect the company.
6. How much does PO financing cost?
The cost of purchase order financing varies from lender to lender. Purchase order financing usually costs between 2.5% to 20% of the funding amount depending on certain factors like the quality of your purchase order, risk factors, and how long it takes the lender to get repaid.
Apply for Purchase Order Financing Today!
Purchase order financing is a great option if you need fast cash to fulfill customer orders. Once qualified, you can receive funding within 24 to 48 hours.