Looking For Purchase Order Financing Companies? Here’s What You Need to Know
Ezra Cabrera | October 12, 2021
Key Takeaways
- Purchase order financing allows you to fund any manufacturing or production costs in advance so you can deliver your customers’ orders on time.
- If you’re looking for purchase order financing companies, you need to know that the basic requirement is to have a minimum of 30% profit margin. Also, the products you’re seeking funding for should already be completed and assembled. That means, your products must be ready for shipping to customers.
- Most lenders will not work with small businesses who offer raw materials to their customers. You must be offering a fully completed product in order to qualify. However, lenders like 1st Commercial Capital offer a special type of purchase order financing to companies that sell raw materials, albeit it’s much harder to qualify for.
- Knowing the lender’s history and financing background are crucial, but if you want to work with someone you can trust, you need to ask more questions. We listed them below.
Do you need more funds to finance your business’ growth? If it’s challenging for you to get loan approvals from traditional lenders and you need to deliver customer orders ASAP, purchase order financing may be the best solution for you.
This article will demonstrate why purchase order financing is great for your small business, particularly if you need immediate capital for the mass production of your goods. On top of that, we’ll also help you choose among the most trusted purchase order financing companies in the country by answering some frequently asked questions.
What is Purchase Order Financing?
Purchase order financing is a type of small business financing that allows you to buy the inventory you need to fulfill your customer’s orders. When the demand for your products is high and you don’t have enough capital to produce them, purchase order financing may go a long way in delivering your promise to customers.
How Does Purchase Order Financing Work?
When money is tight and you need to replenish your inventory quickly, purchase order financing is just what you need. It allows you to fund any manufacturing or production costs in advance.
You’ll be working with purchase order financing companies that will be covering the expenses of increased inventory. In return, your customers will pay the financing company directly. Any excess payments from the amount you borrowed will be sent back to you, minus service charges and other fees.
Entrepreneurs and small business owners take advantage of purchase orders to balance and maintain their operating cash flow. It is what they use to support upcoming and existing orders, which is critical in keeping the business running.
Purchase Order Financing Process
Step 1: You (the business) receives the purchase order from your customers
Step 2: The supplier provides you with a cost breakdown of the orders
Step 3: You submit your purchase order to the purchase order financing company
Step 4: Your lender pays your supplier to fulfill orders
Step 5: Your supplier delivers the goods to your customers
Step 6: The customer pays the lender
Step 7: The lender sends back any remaining balances, minus the fees
7-Step Process to a Successful Purchase Order Financing
To better understand how purchase order financing works, here’s the seven-step process.
Step 1: Receive the Purchase Order From Your Customers
A purchase order (PO) is a legal written confirmation that a customer places an order to buy your product or avail your service. It is an official document that states who the buyer is, the exact orders they expect to get at any time, and when they should arrive. Once you receive these POs from your customers, you’ll have an idea of whether you have enough inventory to meet their order.
Step 2: Supplier Provides a Cost Breakdown of the Orders
Once you have your POs, you will coordinate with your supplier to see how much you’ll be needing to meet the demand. Your supplier will provide you with a cost breakdown of the orders, which should show the detailed expenses associated with each PO. Once you have a breakdown of the orders, you’ll have an idea of how much funds you’ll be needing from the purchase order financing company.
Step 3: Submit Purchase Order to Your Preferred Purchase Order Financing Company
Once you have the cost breakdown, you can reach out to your preferred lender to evaluate the details of your purchase order and your eligibility. Take note that each purchase order financing company has their own application process, but be prepared with the basic documents. We’ll cover this later.
Step 4: Your Lender Pays Your Supplier to Fulfill Orders
Once you’ve qualified and were able to submit all the required documents your lender needs, the purchase order financing company will contact your supplier directly to discuss payments. Like other alternative business loans, your lender will pay the supplier to complete your customer’s PO.
Step 5: Your Supplier Delivers the Goods to Your Customers
Upon receipt of the payment, your supplier may start manufacturing your goods and build inventory. In some cases, the supplier may deliver the products directly to your customer. Other times, your supplier will send the goods back to you so you can send them out to customers on time. Shipping will typically depend on your arrangement with suppliers. After that, you or the supplier invoices the customer.
Step 6: The Customer Pays the Lender
Once your customer receives their goods, the next step is for the customer to pay their invoice directly to your lender. The purchase order financing company will collect all payments from your customer until all invoices are paid.
Step 7: The Lender Sends Back Any Excess Payments, Minus Fees
The final step is to wait for your customers to pay their invoices. When that’s done, the lender will send back any excess payments from your customer, minus the fees. Typically, the rate associated with your PO agreement will be set by the lender and applied to the cost of filling the order.
Who Needs Purchase Order Financing?
Small businesses that process an insurmountable number of purchase orders from customers can use purchase order financing when money gets tight. As a general qualification, companies should be selling finished or completed products to their customers.
Unfortunately, those who are selling raw materials instead of finished products won’t qualify for this type of financing. Also, those who offer services may not qualify for purchase order financing.
These are the most common types of businesses that may take advantage of purchase order financing:
- Startups
- Wholesalers and resellers
- Government contractors
- Companies engaged in import and export
- Distributors
When should you get purchase order financing? When your business is growing fast and you don’t have the financial capacity to support it, you can use purchase order financing to loosen your cash flow.
On top of that, if you’re in the retail business and you experience seasonal sales spikes, purchase order financing will come in handy. Most of your customers will buy in bulk, so having access to additional funds can help you fulfill the quantity or orders you have committed to.
Purchase Order Financing Companies to Consider
If you think purchase order financing is right for you, there are a number of companies you can work with. Here are the top three purchase order financing companies you can consider.
1. eCapital
eCapital is one of the most popular purchase order financing companies in the U.S. as it offers competitive rates and terms, and has been providing small businesses with a steady stream of cash flow since 1999.
When you work with eCapital for purchase order financing, there are a few things to know:
- Loan Amount – eCapital can finance your purchase orders up to $10 million.
- Terms – Your repayment terms with eCapital may be stretched up to 90 days.
- Processing – You may get the funds in up to 14 days for domestic transactions and 30 days for international transactions.
- Interest Rates – For the first 30 days, your rate may be anywhere between 3% and 4%.
- Profit Margin – Must be at least 15%, which is a low requirement compared with other lenders.
- Clients – Although eCapital serves primarily small businesses, new entrepreneurs with smaller orders may find it difficult to get approved.
- Additional Fees – This will depend on the complexity of your transactions. It’s best to coordinate the complete list of fees and charges with a representative from eCapital for full transparency.
2. SMB Compass
SMB Compass is a bespoke financing company that provides entrepreneurs as well as small and large business owners with access to capital. On top of financing, SMB Compass offers proper education and strategy that’s unique to the clients they work with. To date, SMB Compass was able to secure more than $250 million in financing solutions to its clients.
Currently, SMB Compass offers the lowest starting financing amounts, starting at $25,000. That means that small business owners who have small purchase orders may seek funding from SMB Compass.
If you wish to work with SMB Compass, here are a few things to take note of:
- Loan Amount – SMB Compass can finance your purchase orders up to $10 million.
- Terms – Your repayment term is up to 90 days.
- Processing – You may get the funds in up to 14 days for domestic transactions and 30 days for international transactions.
- Interest Rates – Every 30 days, your rate may be anywhere between 1.5% and 3%.
- Profit Margin – Must be at least 30%.
- Additional Fees – This will depend on the complexity of your transactions. It’s best to coordinate the complete list of fees and charges with a representative from SMB Compass for full transparency.
3. 1st Commercial Credit
1st Commercial Credit is a factoring company that offers a broad selection of purchase order funding programs. Its expertise includes invoice factoring, asset-based lending, and extended terms to small businesses.
Here is some information you might find useful:
- Loan Amount – You can borrow from $100,000 to $10 million.
- Terms – Your repayment term is up to 90 days.
- Processing – You may get the funds in up to 14 days for domestic transactions and 30 days for international transactions.
- Interest Rates – Every 30 days, your rate may be anywhere between 1.5% and 3%.
- Profit Margin – Must be at least 25%.
- Additional Fees – This will depend on the complexity of your transactions. It’s best to coordinate the complete list of fees and charges with a representative from 1st Commercial Credit for full transparency.
To work with 1st Commercial Credit, your business must already be providing factoring receivables. They offer three kinds of purchase order services:
- Finished Goods Purchase Order Financing – Dedicated for US-based importers who need to pay overseas suppliers. This covers the finished and packaged goods and logistics.
- Light Assembly Finance – Dedicated for clients who are yet to assemble or manufacture their goods. Light assembly financing is often difficult to qualify for. You must have a proven track record and consistent delivery performance with the products you are seeking to be funded. The good news is, this can include labor costs and import fees.
- Production Finance – Dedicated for US clients who are already factoring. The minimum requirements for this type of financing are the following: the business must be in operation for a minimum of two years; you must have historical sales of products you want to be funded; you must have a financially stable supplier, good paying customers, tax reports, etc.
How to Qualify for Purchase Order Financing
Unlike traditional loans you get from banks or credit unions, qualifying for purchase order financing is much easier. In fact, you don’t need to have a good credit standing in order to qualify. That said, you still need to show your creditworthiness in other ways.
Here are the basic qualifications you need to take note of:
- A finished, completed, or fully assembled product. In the case of 1st Commercial Credit, they have a special type of purchase order financing where you can include raw materials and labor costs.
- A large amount of purchase orders from customers.
- Your customers must be other businesses or government entities
- You must have reputable suppliers.
- Your profit margin should be at least 30%, but this will depend on the lender you’ll be working with.
- Customers who have submitted a PO to you should have good credit rating.
Questions to Ask Before Working with Purchase Order Financing Companies
When it comes to finding the right purchase order financing company to work with you and your business, it’s best to shop around and compare. We’ve compiled a list of questions to help guide your research as you do just that.
Questions to ask purchase order financing companies:
- How long have you been providing purchase order financing to small businesses?
- How many clients have you had that are in the same industry as my business?
- Is purchase order financing the best solution for me? What other financing solutions best fit my needs?
- Would there be a single point of contact from your company? Is he or she an expert in purchase order financing?
- How do you pay your suppliers? What processes do you go through?
- How should my customers pay you? Cash, check or credit? Should my customers pay upfront or can they pay you in installments?
- What are the costs included in our agreement? What charges should I expect? What fees can I eliminate?
- How do you background check my suppliers and customers? What requirements do you need?
By asking lender candidates these questions, you will have a better idea of which one is the best fit for you and your business before you sign any agreement with them.
Bottomline
For many new businesses, it’s hard to keep up with changing market trends. You never know which of your products will sell fast, unless you already have data to back that up. Sometimes you have just enough inventory to cover the day’s orders; some days, you’ll need to pay your suppliers more than usual to hasten production or get your products in advance.
Purchase order financing can help you gain access to funds so you can deliver your customer’s orders on time. If you wish to know more about purchase order financing, you can contact SMB Compass via e-mail at info@smbcompass.com. We’d be glad to answer any questions you have.
About the Author
