In the modern marketplace, businesses from a variety of industries face challenges when scaling up. Supply chain issues, new equipment, and labor costs are just some of the factors that affect cash flow. While many seek help in the form of bank loans, these are often limited in scope in terms of the support they can give to growing businesses—especially if they have not been operating for very long.
Here we explain how purchase order (PO) financing works, and outline the reasons why it’s often a suitable option for businesses of many shapes and sizes.
What is Purchase Order Financing?
Few will argue that more customer orders are bad for a business. It is a huge positive when demand for goods and products increases—more revenue is essential for a business to grow, invest in equipment, employ staff, and more.
A less widely-known truth is that meeting customer demand is challenging. Often businesses have to turn away customer orders because the costs of paying suppliers to fill them are simply too high. This only leads to more pressure on the business to find ways to achieve profitability and growth.
That’s where many turn to purchase order (PO) financing. Through a third-party purchase order financing company (sometimes mistakenly called a ‘purchase order lender’ or ‘purchase order financing lender’), the business covers the costs of supply, filling customer orders without using up working capital. Though they need to pay the financing provider back later on, in the short term this solution frees up capital for the business to scale.
How Does PO Financing Work?
When a business requests help from PO financing, they provide the open purchase order that the customer has submitted. The process typically follows this sequence.
- Business applies for PO financing
- If approved, the PO financer pays the supplier to complete the order
- Supplier makes/sends the product to the customer
- Business invoices customer
- Customer sends payment directly to the PO financer
- PO financer deducts fee from payment, before sending remaining balance back to client
Who is PO Financing For?
Distributors, resellers, wholesalers and omnichannel brands are just a few examples of businesses who benefit from PO financing. Businesses who request PO financing do so because it is faster to obtain than a bank loan, allowing them to meet urgent customer demand. Smaller and younger businesses often do not qualify under the more stringent terms of traditional lenders, making the wider eligibility criteria of PO financing attractive.
Apparel Business Example
A common example of where PO financing supports business is in the apparel industry. Most clothing brands experience varying levels of demand for products throughout the year. They also often outsource production to suppliers to make and deliver the products.
For example, if a swimwear brand receives an unexpectedly large volume of stock at the beginning of the season but does not have enough working capital to pay for inventory, they face having to decline the order.
Another common scenario is that there may be enough cash to cover supply costs, but long wait times between filling the order and receiving end-buyer payment constrain the budget.
In this situation, PO financing companies help the business by directly paying the supplier to buy more materials, reducing the strain on cash flow. With a faster turnaround time than conventional bank loans, the business can respond quickly to shifts in seasonal demand and use it to achieve growth.
Reasons To Work With a PO Financing Company
PO financing is not a catch-all solution for all businesses. It is important to take into account your circumstances to make sure it is the right solution for you. That said, it can be a desirable option for several reasons:
Capital access
The PO financing process is often a lot faster to obtain than a bank loan or other mainstream financing options. Lending applications have strict requirements, and the wait for approval can be lengthy. PO financing typically has a much faster turnaround, allowing you to quickly meet demand.
Flexibility
PO financing is less stringent than conventional finance. As a PO financer, Setscale understands first-hand what it means to be on the cusp of growth. We look beyond your credit score and explore ongoing opportunities to support you in scaling your business.
Growth
While some companies even sell off their equity to make sure they can accept all purchase orders, PO financing avoids the compromise between supply and demand. If you have momentum but are being held back by a lack of working capital, PO financing supports you with financial management, letting you focus on bringing in more revenue through product development, sales and marketing.
What to consider
Timeframe
Don’t expect to receive funds immediately. Although faster than traditional loans, if your business is looking for instant capital, this deadline will be too tight. PO financers need to review vital documents such as the open purchase order, supplier history and business. If the purchase order needs to be fulfilled with a 24-hour turnaround, this is likely to be too tight a deadline.
Credit
While we consider more factors than credit alone when reviewing a funding application, it is important to us that your buyers are credit-worthy and that you have a proven supply chain.
Transaction
PO financing lets businesses manage their cash flow and supply chain, but not for all expenditures. Unlike a working capital loan, it only covers specific transactions. PO financing requests are only viable with an individual open purchase order.
Setscale’s flexible solution supports your business growth
Our team draws on experience from trade finance, FinTech, CPG, retail, and beyond. We know first hand what it takes to grow a business and the obstacles ambitious entrepreneurs face. That’s why we prioritize flexibility for our seller partners. We provide a non-dilutive solution, and our holistic approach accounts for more than just credit score—and we don’t get paid until you do. Find out more on our solutions page or fill in a request form today to get started.
