Businesses often experience periods of financial shortage or uncertainty, especially when purchase orders create gaps in cash flow. When a company lands a substantial purchase order from a large corporation or government agency, various necessities are required. A company may look to purchase supplies, materials, or hire additional staff to accommodate the purchase order. Without a financial reserve or steady cash flow, businesses’ orders can face major obstacles prior to fulfillment.
PO Financing as a Capital Source
Many businesses turn to PO financing as it is secured by the receivables or inventories of the business. It doesn’t require business or personal assets for collateral; instead, it utilizes the purchase order. Possessing the funds to cover immediate costs keeps companies operating smoothly, while focusing on new business.
How PO Financing Works
When a purchase order is received, the financing company will usually agree to pay the supplier a percentage of the cost of supplies. Once the order is delivered, the customer is invoiced. The financing company then collects the invoice amount and remits the balance to the business. The terms of the invoice also remain in effect through this transaction.
How Much Does Purchase Order Financing Cost?
Typically, PO financing rates hover at 3% per 30 days, prorated after the final 30 days. However the rate varies depending on a number of factors: industry experience, transaction size, reliability of the supplier, customer creditworthiness and margins. PO financing can be a costly financing alternative, so a solution for many companies has been through accounts receivable factoring. A simple method, as the purchase order loan is paid with an advance on the invoice value. The company fulfills the purchase order and invoices the customer. Afterwards, the company sells the invoice to a factoring company.
Combining PO Financing with Invoice Factoring
Holding 20% in reserve, the factoring company advances the invoice amount. When payment is received for the invoice (under original terms), the factor pays the company the reserve balance less a 1 to 3% factoring fee. Another alternative businesses find helpful is establishing a receivables line of credit to finance their invoices.
Combining existing purchase orders via PO financing, together with accounts receivable factoring, is an excellent solution. In a business where it takes money to make money, keeping a financial reserve and stable flow is the only way to maximize potential of future growth.
Qualifications for PO Financing
Although companies don’t have to qualify based on their credit standing, there are a number of other factors the funder considers for qualification (these may vary depending on the financing company):
- Resold products must be finished without need for modifications
- Gross margins should be upwards of 20% or more
- Suppliers are reliable and financially stability
- End-customers have a strong commercial credit standing
- Purchase orders are non-cancelable with no consignment or guaranteed sale terms