Purchase Order (PO) Financing
Purchase order financing, or PO financing, is a short-term alternative financing solution to meeting customer demand. Businesses may use this funding to purchase more inventory and supplies to fulfill orders. This is beneficial for businesses so that they can finance large purchase orders while not experiencing issues with cash flow. PO financing is available to distributors, wholesales, resellers, importers/exporters, outsourced manufacturers, and more.
How PO financing works
This type of financing is provided by a PO financing lender, who will directly pay your supplier to complete your order. Depending on the lender, they may pay for the entire order or pay a large percentage of it. Meaning, the business owner would be required to pay the other portion. The first step to receiving this funding is to send your order to an alternative finance company along with the supplier’s estimate. The lender will then either approve the entire or a portion of the order, which would normally be around 80-90%.
After approval, the lender pays the supplier to complete the order. Once your customer’s order is fulfilled, the supplier will send the products. The last step for a business owner is to invoice the customer for the product and the alternative financing company will manage the payment process with your customer. Once paid in full, the lender will deduct their fee from the total payments and send the remaining balance to you.
Purchase Order Financing Rates
Rates for this financing vary between lenders. On average, purchase order financing rates are 3% per 30 days on utilized funds. The company calculates these rates based on the risk factors that may arise. Factors such as the size of the supplier payment, the length of time funds are outstanding, and client issues are all considered for these rates. Common rate structures may look something like, 3% for the first 30 days, then 1% per 10 days after. If the advanced amount is $50,000 and the finance company charges 3% per 30 days, if the transaction takes 60 days, the total fees would equal $3,000 (3% x $50,000 = $1,500 per 30 days, $1,500 x 2 = $3,000).
PO Financing Application and Approval Process
You can apply for purchase order financing online with a provider. Most providers require you to submit documents such as your financial statements, business information, the purchase order from your customer, the supplier’s invoice, the invoice provided from you to your customer, and the purchase order to your supplier. Different alternative financing companies will have different standards for approval, however, factors that may be considered by the PO financing provider include:
1. The borrower’s reputation and financial history
2. The gross margin on the transaction
3. Creditworthiness of your customer
4. The supplier’s reputation
You may qualify even with less than perfect debt, since credit is not an important factor that is taken into consideration. No collateral is required since the purchase order secures the advance. Once your application has been reviewed, the approval process normally takes 24-48 hours, and you may receive funding within days of approval.