{"id":5440,"date":"2021-11-15T12:00:10","date_gmt":"2021-11-15T08:00:10","guid":{"rendered":"http:\/\/gccexchange.com\/blog\/?p=5440"},"modified":"2021-11-15T12:00:43","modified_gmt":"2021-11-15T08:00:43","slug":"purchase-order-financing-what-is-it-how-does-it-work","status":"publish","type":"post","link":"https:\/\/gccexchange.com\/blog\/purchase-order-financing-what-is-it-how-does-it-work\/","title":{"rendered":"Purchase Order Financing: What Is It & How Does It Work?"},"content":{"rendered":"\n

Having enough cash flow is vital in running a business. Unfortunately,\nmany businesses often experience cash flow issues that could render them unable\nto operate their business well. Business owners know how damaging it can be for\ntheir sales and reputation if they turn customers away because they\u2019re not\nconfident that they can fulfill their orders.<\/p>\n\n\n\n

To prevent this from happening, most of them apply for purchase order financing<\/a>. This article will outline what you need to know about P.O. financing, including what it is, how it works, and how to qualify for one.\u00a0 <\/p>\n\n\n\n

Let\u2019s start. <\/p>\n\n\n\n

What is Purchase Order (P.O.) Financing?<\/h2>\n\n\n\n

Purchase order financing, or P.O. financing for short, is one of the most\ncommon funding options businesses use when they need funds to purchase\ninventory that will help fulfill customers\u2019 orders. This gives companies the\nnecessary working capital they need to proceed with business without waiting\nfor their customers to pay them. <\/p>\n\n\n\n

Unlike other types of business loans<\/a>, the business owners won\u2019t get a hold of the money. Instead, the financing company will pay the suppliers directly. Once paid, the suppliers will get to work and ship the orders to the customers. The customer pays the P.O. financing, and the P.O. financing will deduct the advanced cash plus fees before returning the money to the business.<\/p>\n\n\n\n

The funds from the P.O. financing like from SMB Compass<\/a> can cover the raw materials, manufacturing, and shipping of the\nproducts. Having enough funds on hand is vital for business survival. It\nenables business owners to continue taking in orders even with most of their\ncapital tied up in outstanding invoices. <\/p>\n\n\n\n

\"Purchase<\/figure>\n\n\n\n

How Purchase Order Financing Works<\/h2>\n\n\n\n

While others may find it complicated, the\nprocess of P.O. financing is actually more straightforward than it sounds.\nTypically, the P.O. financing process involves three key people:<\/p>\n\n\n\n

  • Business<\/li>
  • Customer<\/li>
  • P.O. financing company<\/li>
  • Supplier<\/li><\/ul>\n\n\n\n

    Here\u2019s a breakdown of how P.O. financing works:<\/p>\n\n\n\n

    1.   \nThe\nbusiness receives a large order<\/h3>\n\n\n\n

    Customers looking to buy specific products from a product-based\nbusiness submit a purchase order outlining the type of product, quantity, and\nspecifications they would like to order. The company evaluates the purchase\norder, gives a rough estimate of how much it\u2019s going to cost to fulfill, then\ndecides whether they need to apply for P.O. financing. <\/p>\n\n\n\n

    If they do, it marks the beginning of the process of purchase order\nfinancing. <\/p>\n\n\n\n

    2.   \nSupplier\nsends a quote for the order<\/h3>\n\n\n\n

    The business then approaches the supplier they\nwill work with to manufacture or supply the products. They send over the\npurchase order and ask for a quote. Basically, a quote is a document that lists\nthe price at which a specific product is sold for. They will also give an\nestimate of how much the whole purchase order is going to cost, from\nmanufacturing to shipping, plus taxes. <\/p>\n\n\n\n

    At this point, you\u2019ll know for sure whether you\ncan afford to fund the order yourself or not. If it\u2019s the latter, then it\u2019s\ntime to start your purchase order application. <\/p>\n\n\n\n

    3.   \nThe\nbusiness applies for P.O. financing<\/h3>\n\n\n\n

    Using the quote sent over by the supplier and supplying the necessary\nfinancial documents, you can start your P.O. financing application. The lender\nwill assess the documents and perform their due diligence. Approval will depend\non your customers\u2019 credit scores, supplier\u2019s reputation, and your business\u2019\nqualification requirements. <\/p>\n\n\n\n

    If all goes well, they could approve a business of 100% funding.\nHowever, this only happens often. A more realistic amount would be between 70%\nto 90% of the purchase order’s total value. <\/p>\n\n\n\n

    4.   \nP.O.\nfinancing company pays the supplier<\/h3>\n\n\n\n

    Once the lender approves the purchase order financing application, they\nwill start processing the funding. This step typically takes one to two weeks,\ndepending on the lender. If the business only qualifies for 70% to 90% of\nfunding, the company would have to cover the remaining 10% to 30% of the amount\nout of pocket.<\/p>\n\n\n\n

    5.   \nOrders\nare shipped to the customers<\/h3>\n\n\n\n

    After the supplier confirms the payment, they will start working on\nmanufacturing or obtaining the products. Once everything is set, they will ship\nthe products directly to the customers. In turn, the customers will confirm the\nreceipt and wait for the invoice from the business. <\/p>\n\n\n\n

    6.   \nThe\nbusiness sends an invoice to the customers <\/h3>\n\n\n\n

    Upon confirming that the customers have\nreceived the products, the business will then generate the invoice and send it\nover to their customers. Depending on the agreement, the business gives\ncustomers the choice of whether they want to pay the products immediately in\nfull or within a specific period (usually 30 to 90 days). Usually, the\ncustomers prefer the latter. <\/p>\n\n\n\n

    If the customer plans to pay overtime, the\nledger or accounts receivable will be handed over to the P.O. company. Once the\ninvoices are in the financing company\u2019s hands, they will handle everything from\nthere \u2013 from payment chasing to the collection. <\/p>\n\n\n\n

    7.   \nThe\ncustomer pays the invoice to the financing company<\/h3>\n\n\n\n

    Since the P.O. the financing company will take\nresponsibility for the invoices, the customers would have to pay the lenders\ndirectly. It\u2019s worth noting that in this arrangement, the customers would be\naware of the fact that the business is working with a financing company.<\/p>\n\n\n\n

    8.   \nThe\nfinancing company gets paid<\/h3>\n\n\n\n

    Once the customer(s) settle their balance, it\u2019s time for the P.O.\nfinancing company to take their cut. They will deduct the amount they paid the\nsuppliers, plus the fees associated with the financing. The remaining balance\nis then your cut of the profits, which the lenders will send back after they\u2019ve\ndeducted the advanced amount. <\/p>\n\n\n\n

    P.O. Financing Qualifications<\/h2>\n\n\n\n

    Like any other type of business financing, purchase order financing\nisn\u2019t suitable for all businesses. Generally, you\u2019d have to be a product-based\ncompany to qualify. <\/p>\n\n\n\n

    If you\u2019re wondering what a business needs to be or have in order to\nqualify, here\u2019s a quick run-down:<\/p>\n\n\n\n

    • Must sell fully assembled finished-products<\/li>
    • Must be a B2B (Business-to-Business) or B2G\n(Business-to-Government) company<\/li>
    • Highly reputable suppliers<\/li>
    • Creditworthy customers<\/li><\/ul>\n\n\n\n

      Purchase order financing is most commonly used\nby companies that accept purchase orders in large volumes. Here are the typical\ncompanies that take advantage of this type of funding:<\/p>\n\n\n\n

      • Import\/Export Companies<\/li>
      • Retailers<\/li>
      • Wholesalers<\/li>
      • Government contractors<\/li>
      • Resellers<\/li>
      • Manufacturers<\/li><\/ul>\n\n\n\n

        The best thing about this financing is that\neven start-up companies can qualify. Since lenders primarily base the approval\non your customers\u2019 credit rating and supplier\u2019s reputation, even if the\nbusiness has bad or insufficient credit, you can still qualify for P.O.\nfinancing. <\/p>\n\n\n\n

        Final Thoughts: Is Purchase Order Financing for You?<\/h2>\n\n\n\n

        Businesses experience unique challenges. When it comes to choosing\nwhich financing solution is best for a business, the answer will mainly rely on\nthe company\u2019s needs. In other words, there\u2019s no one-size-fits-all financing\nsolution for businesses. <\/p>\n\n\n\n

        Purchase order financing is just one of the many businesses, specifically, those that sell tangible products in bulk, used to boost their cash flow and afford large customer orders. When used the right way, it\u2019s a financial resource that will open up bigger and better opportunities for your business. <\/p>\n\n\n\n