Purchase Order Financing

Michelle Adams

Whether you own a startup or medium-sized business, you can benefit from exploring various funding options. One type of funding solution that may help you meet your short-term funding goals is purchase order financing. Purchase order financing has been gaining traction in recent years due to its ability to bring in fast cash for certain types of businesses. If your business relies heavily on purchase orders then the purchase orders themselves can be used as a type of collateral to secure a loan. This type of loan is called purchase order financing and is beneficial for businesses who need funding quickly and without any long-term payment installations.

How Does Purchase Order Financing Work?

Before you understand how purchase order financing works, it is important to be aware of the fact that purchase order financing actually has very specific requirements. It is actually only able to help businesses that meet a very specific type of criteria. Purchase order financing is targeted towards distributors and resellers who have gotten a purchase order that exceeds their ability to fulfill. When they receive a purchase order fund, they will be able to fill this order and receive the payment from the customer. If a company is more of a direct manufacturer, then supply chain financing may be a better option.

See if your business fits the criteria for a purchase order loan:

  • Your orders are at a minimum of $50,000
  • You purchase and resell products with no need for customizing the product
  • Your company is not the direct manufacturer
  • You have gross margins that are at a minimum of 20%
  • All of your customers have good commercial credit
  • Your suppliers maintain a positive history of delivering products and are in great shape financially
  • Your purchase orders are non-cancelable and have no guaranteed sale terms

Once you have ascertained whether or not your business is a good fit for purchase order financing, you can then explore this option further to see how to make it work well for your needs.

Transaction Structure of a Purchase Order Fund

A purchase order financing transaction has a typical way that it is usually structured. If your customer has placed an order for a specific amount, and the company doesn’t have the money to get the products from their supplier, then the purchase order loan can help. The purchase order financing company will help you to complete the sale by paying the supplier directly. After the payment is received by the supplier, the supplier will then produce the goods so that you can give them to your customer. You can then invoice your customer for the merchandise and then pay the financing company.

 

Purchase Order Financing

Understanding The Basics of Purchase Order Financing Rates

Purchase order financing rates can vary based on the lender that is issuing the purchase order loan. However, in general, purchase order financing companies will charge their rates based on the funds that are being utilized. These are funds that are used to pay the manufacturer or supplier. Financing companies like to use a tier-based structure when it comes to large purchase orders. They will break down the loan into segmented installments in order to finance each as a separate loan.

Rate Structure on Purchase Order Financing Loans

Every purchase order lender will structure their proposal in a unique way based on the revenue of the business that they are funding as well as the size of the purchase orders. However, the below models are typical and assume a rate of 3% per 30.

3% for the first 30 days of the loan, 1% for the next 10 days after

3% for the first 30 days of the loan, 0.1% for each day following

2% for each day for the next 20 days, 1% for 10 days following

In general, when it comes to understanding purchase order financing rates, it helps to be aware that they average 30% for 30 days on the funds that are utilized. The rates tend to fluctuate based on the actual transaction. There are a variety of things that can cause the rates to fluctuate including the reputation of the manufacturer as well as the track record of the customer making the purchase.

Purchase order financing minimums

When it comes to making a loan for a purchase order financing transaction, there are certain minimums that the purchase order lender will require. In most cases, the financing companies will only handle transactions that fit their size criteria. In other instances, they choose to only work with customers that need a minimum amount of financing each year. It helps to understand each lender’s minimum prior to applying for a purchase order financing loan with them. Additionally, when choosing a purchase order funding lender, it helps to consider other factors other than just the rate. Some other considerations to make when it comes to choosing a lender include:

  • Industry experience
  • Capital sources
  • Transaction flexibility
  • Transaction minimums
  • Transaction costs
Purchase Order Financing

Purchase Order Financing For Startups

If your business is a startup and you are searching for funding sources, you may be considering purchase order financing. Although purchase order financing for startups might be a good fit for certain types of companies, it’s not a great fit for all new companies. This is because the requirements for purchase order financing tend to be more stringent. In general, purchase order financing is most aptly suited to wholesale companies that are able to fulfill large purchase orders. The startup company that would be a good fit for this type of loan is a wholesale company that moves products between buyer and supplier.

Purchase order financing can be a great option for startups because the loan is extended not based on the company’s creditworthiness, but instead on that of the customer’s profile. The lender will look at the supplier as well as at the customer’s profile in order to make the best possible determination about their level of risk. Another reason that this can be a good option for startups is that there is no need to worry about making installment payments. The funds are returned as soon as the invoice clears or the purchase order is fulfilled.

Purchase Order Financing vs Factoring

Purchase order financing and invoice factoring are often thought of as very similar but in fact, they are two completely different types of funding solutions. One may be appropriate for one business while another type of loan may be better for another type of business. The main thing that unites both types of loans is that they both provide assistance to businesses that have sales that are outpacing their ability to fulfill the orders. Business owners use both options in order to stabilize their cash flow and fill in the gaps in income.

Understanding purchase order financing vs factoring can assist you with finding the best funding option to meet your business goals and objectives. The main difference between purchase order financing and factoring lies in how they manage cash flow.

Purchase order financing basics:

In general, a purchase order loan acts like an advance of funds that is sent directly to the supplier. This is done so that you can fulfill a specific order for a customer.

Invoice factoring basics:

An invoice factoring loan is an advance to a business to help fill a gap in revenue until the invoice for a product or service is fulfilled. This type of loan is ideal to use when you have already sold the goods but you are just waiting on the payment. The cost of invoice factoring loans is typically 1.5 percent to 5 percent each month.

Similarities and differences

When a business is expanding quickly, it reaches a pinnacle where the number of sales are outpaced by the incoming revenue. What this does is leave the business without any cash on hand to cover its new orders. With PO financing, as well as invoice factoring, small businesses can stabilize their financial structure and access the working capital that they need. The similarities between these two funding sources are that they can both be obtained in a few days instead of weeks like other types of loans. Many analysts consider them to be a good funding source for new businesses since they don’t have to prove their creditworthiness. Instead, that decision is based on the supplier and the end customer. Additionally, factoring and purchase order financing assist with providing access to extensive amounts of working capital.

The primary difference between purchase order financing vs factoring is that factoring is used after a business has already sold its goods and services while purchase order financing works prior to selling goods.

Commercial Purchase Order Financing

Commercial purchase order financing relates to the type of businesses that normally do purchase order loans. Generally, the type of business that applies for purchase order financing is not a B2C company but is instead a B2B company. The requirements for qualifying for this type of loan are that the business must sell tangible goods, they must have business or government customers, and both the supplier and customer need to be creditworthy. Lenders tend to look for profit margins that are 15 percent or higher.

Is a Purchase Order Loan Right For Your Business?

After learning about purchase order loans and comparing them with invoice factoring loans, you can get a good idea as to whether or not they would be a fit for your financial requirements. Review the criteria to qualify for a purchase order financed loan to determine whether your company profile fits the qualifying description for obtaining this type of loan. Once you have reviewed all of the facts and criteria, you can determine whether or not this loan option is suited to your needs.

Whether you are interested in international purchase order financing or you are trying to find the best purchase order financing company, this funding options may be a great fit. It helps to take some time and do a bit of research in order to find out the details involved in this type of loan. In general, you will want to consult with a business financial advisor to ensure that you are making the right decision for your business.

How Can Business Line of Credit Hub Help?

At Business Line of Credit Hub, our goal is to connect lenders with the business owners who need funding. Whether you are looking for purchase order financing or any other type of short term business loan, we are here to help. Our lenders have all been vetted for integrity and value and they provide the highest levels of quality service and flexible loan options. With a wide variety of lenders available to fund your loan, you are guaranteed to find a lender that is right for your needs. We work with companies of all types and sizes who are searching for the best funding solutions without the hassle. We invite you to browse our website in order to read over the variety of articles we have available on the different types of loans. Find the loan type that best fits your business needs and goals. Then apply through our online portal in order to get the funding you need without the wait. At Business Line of Credit Hub, we are able to provide access to lenders that can fund loans of up to $150,000.

Flexible Lending Terms

Business Line of Credit Hub is the leading provider of flexible loan options for businesses of all types. If your business is new or just doesn’t fit the standard credit profile, you can still find a funding solution from our lenders. We provide access to an easy to use application form and we make sure that you never have to wait too long to receive your decision. With flexible loan options and higher approval rates, you are more likely to find just the right loan to suit your requirements. Whether your business is focused on products or services, you are sure to find the right funding solution to fit your long-term and short-term financing goals.

Michelle Adams
Business Consultant

Michelle worked at a teller at her local bank while she was earning her degree in economics. Then, after completing an MBA, she came back to the bank as a loan officer. As a result, Michelle is uniquely suited to providing advice to small businesses when it comes to selecting the best loan and credit products.