Purchase Order Financing
Purchase order financing (PO financing) is an advance from a financing institution that pays your suppliers for goods you’re reselling or distributing to a customer who has completed a written purchase order. You can finance up to 100% of the purchase order costs with typical rates falling between 1.8% and 6% per month.
Purchase order financing typically takes 1-2 weeks to fund. If you need a solution quicker than that, you may want to consider a short-term business loan. Short-term lenders have easy online application processes and higher approval rates than traditional business loans. Plus, they can typically have you funded in 1 day.
A company will need PO financing when:
- You need expertise to handle the Financing
- You need additional working capital
- You need a quick response to an immediate sales need
- You don’t want to incur additional credit risk, be it foreign or domestic
- You want your buyers and sellers to not know each other
- You want the opportunity to make additional profit
Every PO funding transaction stands on its own. We look at your business history, the credit worthiness of the buyer, the ability of your supplier to produce the goods, and if the transaction is profitable for all parties.
We consider purchase order financing for those companies with a track record of producing goods. Your company may be young or a startup, but your company management must have a proven track record of producing goods.
Buyers Purchase Order
Your buying firm must be reputable with a good credit line. The purchase order for factoring must be verifiable.
Your suppliers must know your product and be able to produce it in time and to meet your buyer’s terms. The supplier must be a firm with a good business history and track record of producing goods.
The transaction after all expenses must make a profit for all parties. Payment of the money lent to support the transaction can come from any number of sources such as factored receivables.
Finished goods are easier to Finance than non-finished goods. J&D finances both types.
Purchase Order Funding is available only to qualified customers. PO factoring or financing falls into two types:
- Finished Goods
- Non-Finished Goods
Finished Goods refer to transactions where the goods are never touched by you. Usually, these goods go directly from your supplier to your buyer. You never take direct possession.
Non-Finished Goods are when you, the seller, take possession of the goods either in a raw state or a semi-finished state. In either case you must take possession of the product.
Finished Goods are easier to finance than Non-Finished Goods. We will need to assess your ability to complete the transaction in processing the goods for the final shipment to your buyer. J&D Financial Corporation provides purchase order factoring for both Finished and Non-Finished Goods.
In order to consider purchase order loans for your firm we will need:
- A Completed PO Factoring Application Form
- Your invoice to buyer
- Your supplier’s invoice
- Your purchase order to your supplier
- Profit on transaction – gross margins >18% – see work sheet
- Business History
- P&L (most recent)
- Balance Sheet (most recent)
- Time frame to produce goods
- Credit information on your buyer
- Supplier Information
- Finished Goods or Non-Finished Goods
Who Uses PO Financing & When?
There are many situations where purchase order financing might be right for your business. Each is centered on the need for cash to make purchases from suppliers that you can’t afford, but need in order to fulfill a customer’s order. Companies that use purchase order financing include:
- Importers or Exporters of Finished Goods
- Outsourced Manufacturers
Purchase order financing can help you with various scenarios that include
- Seasonal Sales Spikes: At the beginning of a seasonal sales spike you may receive purchase orders that exceed your existing working capital.
- Substantial Growth: If your sales growth is outpacing existing small business lines of credit due to growth then you may be a good candidate for PO financing.
- Consistently Tight Cash Flow: Many small businesses have consistent cash flow problems at specific points of the month on a consistent basis.
How Purchase Order Financing Works?
Purchase order financing involves a minimum of four different parties who can complicate it at different points in the process. These parties are:
- The borrower: This is the one seeking financing.
- The PO financing company: This is the company providing the financing.
- The supplier: This is the company that supplies the goods which the borrower resells or distributes.
- The customer: This is the borrower’s customer who they sell to directly.
Each party involved can make it more difficult for you to complete the financing process, and can prevent you from keeping your costs down. For example, if your suppliers are slow to manufacture goods then you could be paying extra for the length of time it takes them to supply the goods. And if you’ve promised your customers terms on their payments then you could be looking at additional costs as well because the longer it takes for your financing company to be paid the more expensive your loan gets.
Steps to purchase order financing
1. The borrower receives a large purchase order from their customer.
2. The customer gets a written proposal from their supplier on what it would cost to purchase the goods necessary to fulfill the customer’s order. At this point, if the customer doesn’t have the available funds necessary to fulfill the order then they seek outside financing.
3. The borrower finds the right PO financing company, applies for the funding they need, and gets approved. In order to apply you will need to provide both the customer’s purchase order and the supplier’s proposal.
4. Once the borrower is approved, the PO financing company pays the supplier, through a letter of credit, to manufacture and deliver the goods needed to fulfill the purchase order.
5. The supplier delivers the goods to the customer directly, or delivers them directly to the borrower if they have a different delivery method they prefer. Once the customer receives the goods they must accept the order.
6. The borrower invoices their customer for the goods and either demands immediate payment or gives them net terms. The longer it takes to receive payment from the customer, the more expensive the financing becomes.
7. The customer pays the PO financing company directly for the full price on the borrower’s invoice.
8. The PO financing company deducts their fees from the funds and then pays the remaining balance to the borrower.
Purchase Order Financing Qualifications
It’s pretty easy to qualify for purchase order financing as long as you deal with established, reputable customers and suppliers. Even newer businesses can qualify if you have verifiable industry experience.
The most important qualifications are that you’re a B2B or B2G business that sells tangible goods with a minimum of 15% profit margins. And that your supplier and customer involved in the transaction are creditworthy.
Profit margin is the one requirement that varies the most between financing companies. We’ve seen the minimum requirement as high as 25%, but typically it is set at 15% or 20%. The profit margins are calculated per transaction by using your customer’s written purchase order and your supplier’s written invoice.