Purchase Order Financing

Q: How long does the application process take for purchase order financing?

Fortunately, the application process is not document-intensive, unlike other traditional lending programs. Usually, funds can be secured rather quickly with purchase order financing. Once the lender verifies the purchase order and confirms that the customer has a strong credit and trade history, the funds are approved, and the lender forwards payment to the supplier.

Q: How do you use PO financing?

This type of funding is used by a variety of businesses for an array of different expense types. With PO financing, you are able to maintain a solid business cash flow so you can run your operations as efficiently and productively as possible.

Q: Is collateral required for purchase order financing?

Unlike other types of asset-based lending sources, PO funding uses the outstanding purchase order as collateral to secure the funds. Instead of using inventory, equipment, or real estate as collateral, you are able to capitalize on your existing purchase orders and obtain the funds you need in order to fill requisitions.

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Table of Contents

What is Purchase Order Financing?

Purchase order financing, also known as PO financing, is a funding solution for businesses that lack the working capital to fulfill purchase orders. PO financing companies give business owners the money they need to pay suppliers and vendors.

Essentially, PO funding capitalizes on a business's active purchase orders to secure funding to fulfill customer orders.

By using this source to boost working capital and cash flow, purchase order funding for small businesses can borrow up to 100% of the money or cost needed to fulfill an order the customer places. This offers business owners flexibility when it becomes a challenge to fill active orders, which keeps your cash flow stable.

Loan Amounts

$25,000 – $10,000,000+

Rates

Starting at 15%

Speed

24 - 48 Hours

How Does Purchase Order Financing Work?

Here’s a breakdown of the steps involved in Purchase Order (PO) Financing:

Step 1: Receiving a Purchase Order from the Customer

The first step occurs when the borrowing business receives a purchase order from its customers. Every purchase order financing relationship begins when the small business (borrower) determines they need or want financial support to supplement their cash flow and fill their orders. Whether their cash flow is not enough to support the purchase order, or the business wants to keep funds available for other costs, purchase order financing can be a beneficial resource for any small business.

Step 2: Supplier Provides Cost Breakdown for Order

Once a small business receives a purchase order from a customer, the next step is to determine what needs to be done to fill the order. Once the order is placed, the borrowing business provides the purchase order information to their supplier. The supplier provides a cost breakdown to the borrowing business, which details filling each specific order. This information is essential when applying for PO financing because this is what determines the number of funds necessary to fill the order.

Step 3: Submit Purchase Order to Lender

Step 4: Lender Pays the Supplier

After the lender receives the purchase order and the cost breakdown and assuming the borrower qualifies for purchase order financing, the lender then provides the additional working capital and pays the supplier. This step is commonly misunderstood. Instead of paying the funds directly to the borrower or directly to the customer, like most other forms of lending, the lender pays the supplier to complete the purchase for the customer.

Step 5: Supplier Delivers the Goods to the Customer

Once the supplier receives payment from the lender, the next step is for the supplier to make the product, ship or deliver the goods, and invoice the customer. Purchase order financing allows more small businesses to fill their customers’ orders by qualifying to have a lender pay the supplier, who in turn will complete the order.

The lender makes the payment to the supplier enabling the customer to receive their order giving the borrower the ability to transfer the cost of filling an order to a lender.

Step 6: Customer Pays the Lender

Step 7: Lender Pays Balance

Once the invoice is paid to the lender by the customer, the borrowing business receives the balance from the lender. Typically, the rate associated with the purchase order agreement will be established by the lender and applied to the cost of filling the order.

It is important to note that the rates are applied to the cost of the order, not the cost of the purchase order. Once the lender receives the invoice payment from the customer, the lender receives their payment via the feed rate and returns the outstanding balance to the borrowing business.

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Who Can Use Purchase Order Financing?

Small businesses that process a significant volume of purchase orders each month are eligible for purchase order financing. As a primary requirement, the business should be selling finished, assembled, and completed products. This means that a company that sells raw materials, instead of completed ones, won’t qualify for the financing. Purchase Order Financing Companies are financing businesses that doesn’t have solid cash flow to fund or complete customer orders. Also, Purchase Order Finance Companies offer the chance to invest in a business with little or no money upfront.

A purchase order (PO) is a contract that buyers send which indicates the quantities, prices, and types of products or services they are looking to purchase to the PO Financing. These buyers usually order in bulk. However, without the right amount of cash, the suppliers cannot fulfill this order. For that reason, they usually apply for purchase order financing.

This type of funding resource is most commonly used by companies that are rapidly growing and, or not able to fulfill the quantity or size of orders they have committed to. Companies that can take advantage of this financing plan include:

Start-up businesses
Wholesalers
Businesses with poor credit rating
Resellers
Government contractors
Manufacturers
Import and export companies

What Type of Collateral is Used For Purchase Order Financing?

Unlike other types of lending services, PO funding is a specific type of lending vehicle that only considers purchase orders or accounts receivable as assets to be used as collateral to secure funding. Most asset-based lending sources also consider inventory, equipment, or real estate as collateral, but this financing option is restricted to the following types of assets:

Purchase Orders

Purchase orders are the primary asset that most businesses use to secure this kind of funding. PO is a document that is generated by the buyer to authorize a transaction with the seller.

PO’s typically outline the terms of the sale, which include the price of the goods or service, the quantity ordered the terms of payment, the shipping date, and delivery details, along with other incidental details associated with the order. Once the purchase order is accepted by the seller, the purchase order itself can be used as collateral when the seller applies for financing.

The LTV (or loan to value ratio) for PO financing agreements is typically between 30% to 40%, but once the goods are delivered or the services are rendered, the purchase order becomes an invoice and the remaining 40-50% of the invoice can be advanced from the lender to the borrowing business.

Accounts Receivable (A/R)

The second type of asset that can be used for purchase order financing is accounts receivable. Accounts receivable (A/R) is money that is owed to the business after a sale has been made or services have been rendered from the seller to the buyer.

For most purchase order lenders, the accounts receivable directly associated with the purchase order funded will allow the lender to collect payment after the supplier delivers the goods.

Typically, the LTV ratio for accounts receivable is up to 90% of the face value of the invoices associated with the purchase orders. These rates can vary from lender to lender and will be determined based on different characteristics of the borrowing business and purchase order agreements.

Lenders will typically consider the credit strength and quality of the customers, the payment terms that are offered in the purchase order agreements, as well as the diversification of the client base associated with the borrowing business.

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What Are PO Financing's Rates and Fees?

Purchase order funding rates and fees are based on various factors that the lender considers. Because of the nature of the financial risk associated with this type of financing, the rates and fees are often more expensive than with other traditional bank financing sources. Purchase order funding is thus a viable and popular alternative for companies that require a rapid and efficient method of financing their purchase orders.

Often, rates and fees range from 1.5% to 3.5% per 30-day period. It is important to highlight that the rates and fees are applied also to the cost of filling the order, not only the purchase order value.

For example, if a borrower receives a 100% gross margin for a purchase order, and the purchase order has a total value of $100,000, the cost of filling the order would be $50,000. The purchase order financing rates and fees paid by the borrowing business after the customer is invoiced will be applied to the $50,000 cost of filling the order instead of the $100,000 that is invoiced to the customer.

Different lenders take into account several different factors when evaluating applications. As much as possible, lenders try to aim for rates that are affordable, so it can support business growth. The lender will analyze the credit risk of the purchase order loans by assessing the borrowing business’s features and its client base when determining the rates, fees, and qualification status.

What are the Qualifications for PO Financing?

Aside from the fast approval benefit of PO financing, turns out, it’s also relatively easy to qualify for. All you have to do is to have a business that meets the following requirements:

Sell finished, assembled products
Accept purchase orders in large amounts
Sell to other businesses or government customers
Have reputable suppliers that offer high-quality products
Profit margins should reach at least 30%
Customers must have a good credit background

Business owners interested in purchase order financing must remember that even if they don’t have a good credit rating, they can still qualify. As long as they can prove their customer’s creditworthiness and follow the guidelines above, they can take advantage of purchase order financing to improve their working capital.

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FAQ

How do you qualify for PO financing?

The application and qualification process is determined by and based solely on the trade and credit history of customers, rather than the credit history of the borrowing small business, as is the case with other types of lending products.

With purchase order financing, the lender is primarily concerned that the borrower’s customers who are being invoiced are financially healthy, and able to make the invoice payments.

How long does the application process take for purchase order financing?

How do you use PO financing?

Is collateral required for purchase order financing?

Purchase Order Financing

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What is Purchase Order Financing?

Loan Amounts

Rates

Speed

How Does Purchase Order Financing Work?

Who Can Use Purchase Order Financing?

What Type of Collateral is Used For Purchase Order Financing?

What Are PO Financing's Rates and Fees?

What are the Qualifications for PO Financing?

FAQ

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