Businesses need to keep their cash flow stable so they can continue running their business operations without limitations. This is why many small business owners turn to Purchase Order Financing. This provides a way for a company to fulfill their orders from clients despite experiencing a gap in their cash flow. However, it’s also tends to be one of the financing options many entrepreneurs misunderstand.
Although the concept of Purchase Order Financing may look simple on the surface, there are many factors involved in the transaction. For instance, the manufacturing schedule and quality requirements may affect the approval of the funding. This is why entrepreneurs should learn more about it before deciding to apply for one.
It’s important to work with a known reputable company if you’re planning to apply for PO financing. Doing so will not only let you understand the process better, but it can also help you maximize your funding. The following are answers to a selection of common questions asked by entrepreneurs regarding PO financing:
1. What is PO Financing?
Purchase Order (PO) Financing is an alternative funding option that helps businesses fulfill the orders they receive from their clients if they don’t have enough cash to fulfill it themselves. The PO financing company takes the purchase orders, pays the suppliers directly, and has the goods delivered to customers.
Once the clients receive their orders, they will then pay the financing company. The financing company, in turn, deducts the payment for the loan from the customer’s payment before sending the remaining amount to entrepreneurs.
A company that handles bulk orders from customers benefit the most from PO financing. If you’ve just opened your business and received a huge order from a customer, PO financing can get you the funds you need to complete the order. This way, you won’t have to turn your customer’s order down which could have a negative impact on your relationship with them.
2. What Industries Can Benefit Most from PO Financing
Small, start-up businesses that need supplies to complete their clients’ orders are the types of businesses that need Purchase Order Financing. These include companies like:
- Importers or exporters of finished goods
- Government contractors
- Companies with low credit ratings
- Seasonal businesses
To qualify for a purchase order financing, your business should be focused on doing business with other businesses or government sectors. You should also be selling finished products. If your company offers services, then this type of financing might not be the ideal solution for you.
3. What are the Rates for PO Financing?
There’s no sure way of telling what the rates are exactly for PO financing. The terms can depend on the PO financing company. So, an entrepreneur who’s planning on applying for this should sort out the terms and conditions for the financing first. Typically, banks and other lending institutions charge about 5% of the total payment sent to the suppliers excluding ancillary costs.
4. What is a Letter of Credit (LC)?
A letter of credit is a document provided by the banks that assure suppliers that the buyer can pay on time and for the full amount. In the event a buyer cannot make the payment on a purchase, the bank pays the suppliers, instead. Banks usually issue this when they’re confident their client can repay the loan. This means they may have to check the credit background of their clients.
5. What Are Some of the Benefits of Purchase Order Financing?
One of the biggest benefits of PO financing is the fact that it lets entrepreneurs accept large orders. Since companies may have to wait for a while before they’re paid, it may be impossible for them to handle larger orders from clients without the help of outside financing. With PO financing, they have a sure way to pay the suppliers even when they lack the capital.
Other advantages of PO financing include:
- The PO financing company collects the payments from the business clients
- The PO financing company pays the supplier directly
- It’s not a loan, but rather, an advance collection of funds
- It’s a great option for start-up companies who receive large orders
- The funding can cover up to 100% of the costs associated with a purchase order
- Rates are flexible
6. How Much Funding Can Entrepreneurs Get from PO Financing?
The amount entrepreneurs receive from PO financing depends on the company. They can base the amount on your customer’s creditworthiness, supplier’s reputation, or the business’ qualification requirements.
Some may receive 100% funding while others may be approved for 80% to 95%. This means that the business must make up for the remaining percentage and pay a supplier directly.
Get Funded Through Purchase Order Financing Now
If you need a business loan, there are numerous options available for your business. Purchase order financing, for one, is an option that can help you with your plans and desire to expand and grow your company.
As long as business has reputable customers and suppliers, they can be approved for PO financing. If you have questions, best you speak with a financial expert and; learn about the various loan options available for you and your small business.