Purchase order financing 101
Purchase order financing (“PO Funding”) can offer your business a solution to any shortage of working capital related to a specific customer order. This shortage can prevent your business from fulfilling orders and halt your production cycle. Purchase order financing is provided by an alternative financing company by facilitating the transition between a business’s suppliers and its customers. The process is simple. Upon receiving a purchase order (the “PO”) from a customer, the PO is sent to a supplier for a quote. The quote and PO are then sent to the financing company for approval and payment.
Once approved, capital is sent over by the company and the financing partner to the supplier to fulfil the order. Finally, once the order has been executed, the business provides the customer with an invoice which will be paid directly to the financing company. Afterwards, the company will send you the customer’s balance minus a small service fee, thus completing the transaction.
With purchase order financing, your suppliers get paid quicker.
Building a strong relationship with your supplier is important. A good relationship with your supplier can boost operational efficiency and streamline the supply chain to maximize cash flow.
Getting your suppliers paid faster and on time can make or break your working relationship. If you qualify for 100% PO financing, the PO funding company will pay your supplier directly for the amount of the PO. However, if you qualify for a lower advance rate on your PO, you simply pay the supplier the difference between the PO amount and the amount funded by the PO finance company. Regardless of the advance rate, this will speed up the process of payment and the delivery of goods needed to satisfy the orders. The financing company achieves this by either paying cash upfront or using a letter of credit stating that once the order has been completed and shipped, payment will be made.
With more efficient accounts payable, you can actualize more orders
Meeting customer demand may be challenging. Especially if you are in the beginning stages of your business, or have too many orders in your queue. Turning down even one order could impact your company’s growth and important business relationships. By financing your purchase orders, you can fulfill these demands. Then actualize more orders, quickly receive working capital, and improve your overall cash flow.
Applying for purchase order financing
Unlike traditional business loans, obtaining funding from a financing company is a quick and straightforward process. Since purchase order financing is not a loan, your personal credit score is not a major consideration for approval. However, lenders do require a valid purchase order from a creditworthy customer. Additionally, they require an invoice from the supplier to be sent over for approval.
If you are approved, the lender will then discuss the amount and any rates, fees, or terms applicable to your funding with you. As an alternative financing company, CapFlow Funding Group can help you navigate what funding solution is best for your business. If you have any more questions regarding purchase order financing or other options, you may contact us here.