Creating a startup is not an endeavor for the faint of heart. To make it as an entrepreneur means taking on risks, having a clear vision and persevering through many obstacles. It also requires liquid cash.
Startups have difficulty finding capital for many reasons — lack of willing investors, a limited track record, uncertainty in the market and more. Even when demand is rising, cash flow problems can still inhibit a startup’s chances of growth and success.
Purchase order (PO) financing is one solution available to startups struggling with finding capital to meet demand. In this article, we outline how PO financing providers can support emerging businesses with a sustainable, flexible financing solution during the critical early stages, and beyond.
The Capital Struggle for Startups
Startups are fueled by ambition, but face huge challenges getting off the ground —especially when it comes to funding. We know that the largest threat to the success of a business in its infancy is a lack of capital. During periods of rapid growth, new businesses can still struggle with the cost of operations in a fluid and competitive marketplace. Here are some of the main obstacles in getting funding for a startup business:
Common funding issues
Cash flow
Managing cash flow in a business of any size is not easy, but can be especially challenging for new businesses. Entrepreneurs leading startup ventures often find that capital is spent much quicker than they forecasted. Cash burn in excess of forecast makes the startup appear less attractive to some potential investors and lenders.
Credit history
Getting access to working capital is crucial for all businesses, but the age of the business can hurt its chances when pursuing funding applications that rely solely on credit scores. After all, how can a startup supply a credit history if it has only just started? Traditional banks and financial institutions place strict requirements on commercial lending and will often decline funding on the grounds that the lack of credit history leaves them unable to make a proper assessment.
Rapid growth
Despite presenting numerous opportunities for startups, rapid growth can also create problems when it comes to managing cash flow and securing further investment. A quick surge in demand has the mirror effect of driving up inventory costs to keep up with an influx of customer orders. Demand for a product, the goal of every successful entrepreneur can be a curse rather than a blessing if not managed correctly.
What is Purchase Order Financing?
PO financing is a funding solution for startups and businesses of many sizes. It is used to fill open customer orders that would otherwise put a cash constraint on the business.
A new business trying to enter retail rarely (if ever) has the power to require their customer to place a deposit to assist with manufacturing cost. The customer likely will not pay anything at all until at least 30 days after the product is in their hands. Conversely, manufacturers almost always want a newer business to place a deposit to initiate a production, and to make complete payment before the product ships. It is clear that the terms of the manufacturer and the customer combined create a cash crunch for the startup.
With PO financing, a third-party supports the brand in financing its supply chain and meeting demand. The funding provider directly pays suppliers to manufacture and ship orders to the customer.
How it works
The process typically involves the following steps:
- Business applies for PO financing
- If approved, the PO financer pays the manufacturer to complete the order
- Manufacturer ships the product to the customer
- Business invoices customers
- Customer sends payment directly to the PO financer
- PO financer deducts the fee from payment, before sending the remaining balance back to the business
How Purchase Order Financing Supports Startups
Easier capital access
Startups often run into problems acquiring financing from conventional banks. With limited credit history and rapidly growing demand, they often want to avoid time-consuming loan applications. PO financing often involves a quicker turnaround.
Funding growth
PO financing helps startups maintain critical growth by directly funding a business’s supply chain. There is no longer a trade-off between liquidity and seizing the opportunities presented by a much bigger purchase order. The startup can then focus on building on increased demand by growing revenue through marketing, sales and product development.
Improved supplier relationships
Since the PO financer directly pays the supplier to fill open purchase orders, there is no wait on the supply side for necessary funds to make and ship the products. This both enhances production efficiency and strengthens terms with the supplier, improving the startup’s negotiating position and giving them a better chance of securing reduced prices in the long run.
The Cost of PO Financing
The amount that PO financing costs a startup will, again, vary depending on the provider and the size of the purchase order. Although it is not the case for all, there will be some that want to assess credit history. Many will charge monthly interest for the period between the provision of funding and the receipt of the end buyer’s payment.
At Setscale, we are committed to supporting ambitious startups. Since we know first-hand the importance of flexibility in growing a business, our approach is a holistic one. There are no upfront fees and no monthly interest payments. We don’t get paid until you do.
Applying for PO Financing as a Startup
Some of the common pieces of information PO financers ask for include:
- Company information
- Supplier information
- Buyer’s purchase order
- Supplier order
- Payment terms
- Financial statements
- Company and client credit information
- Tax documents
Qualifying with Setscale
When you apply for PO financing with Setscale, provided you are a good fit, you will receive an invitation to our digital application. We work with US-based businesses who:
- Have an annual revenue of over $100k
- Have been operating for over a year
- Sell durable goods (as opposed to perishable goods that last less than 18 months).
We’ll need you to give us your open purchase order information or sales forecast provided by your customer if you don’t have a PO in hand yet, , financial history and business registration and details around your supplier relationship.
Our digital onboarding process takes a few simple steps. After completing the underwriting process, you will need to sign a few electronic documents before we’re ready to fund you.
Keep momentum with Setscale
At Setscale, our goal is to support small and medium-sized businesses in overcoming obstacles to growth. Our team knows first hand what it takes to build a business, and that’s why we believe in providing the right support with a fast and flexible funding solution.
You’re ready, so let’s scale. Get started today by filling in a funding request, and if we think you’re a good fit we will get back to you. You can also find out more about our solutions and the uses of purchase order financing from our Resources Hub.
