You might be a startup, a small business on your way to bigger things, or a larger business looking to reach the next level. The problem is that having enough liquid capital is a requirement for all business types and sizes to achieve growth, and fulfilling open purchase orders often serves as a major obstacle to this opportunity. This is where purchase order financing becomes a valuable tool for scaling your business.
Whether you are simply curious or you are actively exploring options for funding purchase orders, you can find out all you need to know right here. Let’s get started.
What is Purchase Order Financing?
Despite customers placing orders generally being a positive thing, if a company has a limited amount of cash to spend on fulfilling existing customer orders, it makes meeting demand difficult. Many seasoned business owners will appreciate that paying suppliers to fill orders can often mean sacrificing the chance to capitalize on further opportunities. This creates additional pressure of trying to keep up with demand while growing capacity with a view to bringing in more revenue.
Enter purchase order financing. This funding option is designed to let a firm deliver on its existing purchase orders, without sacrificing further opportunities to grow, by meeting increasing consumer demand. That way, a business can scale despite—on paper—not having enough capital to do so. Purchase order financing (otherwise known as ‘PO finance’ or ‘PO funding’) is a solution where a third party provides working capital to a business so they can finance their supply chain and fulfill open purchase orders already placed by their customers.
Who uses Purchase Order Financing?
When you’re ready to scale your operations, it seems impossible to choose between spending capital on managing production and supply chains, and seizing vital opportunities for growth. A whole host of businesses face this problem, no matter their size. Since PO funding is generally faster than a conventional bank loan, it is a good alternative for businesses that are highly seasonal or are fast-growing but have limited capital. These types of vendors can include:
- Distributors
- Resellers
- Wholesalers
- Omnichannel
How PO funding works
When a customer submits a purchase order, they commit to buying a product from you. However, if you don’t have the liquid cash on hand to make and ship goods to your customers, you may need capital support. At this point, you can request help from a purchase order financing company like Setscale, who provides you with capital required to make this happen and continue scaling. Here’s how the process works:
- Business applies for PO funding
- If approved, the PO funder pays the supplier to complete the order
- Manufacturer makes/sends the product to the customer
- Business invoices customer
- Customer sends payment directly to the PO funder
- PO funder deducts fee from payment, before sending remaining balance back to client
If your application is successful, Setscale or the PO funder would pay the supplier/manufacturer directly to fulfill the open purchase order. Now that the burden on your cash flow has been reduced, you can focus your efforts on sales, product development and marketing, without worrying about existing orders hurting your ability to compete in the marketplace.
The benefits of PO funding
External funding options to help you better manage your supply chain may be exactly what you’re looking for. If the orders are pouring in and you need to plug the gap relatively quickly to keep hold of your momentum, PO funding might be the right choice. To be certain, however, it’s important to know the finer details of what happens when you choose this finance option.
1) Easy capital access
Purchase order funding has become a suitable option for many businesses who do not want the hassle of applying for a conventional bank loan, which can be a lengthy process. Applying to PO finance may result in a quick turnaround — for instance, Setscale aims to provide funds to a business within 24 hours of a successful application.
2) Flexible financing
Once you’ve established a strong relationship with your purchase order financing company, you can expect a long and fruitful relationship. As a PO funder, Setscale accounts for more than just your credit score, exploring ongoing opportunities to support you in growing your business. At Setscale, we believe in empowering firms who are on the cusp of growth.
3) Zero collateral
While some companies even sell off their equity to keep things moving, PO finance supports you in managing your supply chain so you can focus your mind on the big picture and bring in more revenue. With Setscale, PO financing will not involve upfront capital — you don’t need to put any assets at risk to obtain funding with us.
What to consider before applying
Funding purchase orders can transform operations for a range of businesses, but may not always be the right fit for every situation. It is important to take into account your circumstances to make sure it is the solution your organization needs.
1) Urgency
If your application is accurate and supplies the lender with adequate information, you can look forward to fast access to funding. However, don’t expect to receive funds instantly: if the purchase order needs to be fulfilled with a 24-hour turnaround, this is likely to be too tight a deadline.
2) Customer credit
While we consider more than just credit as the only factor in a funding application, it is important to us that your buyers are credit worthy and you have a proven supply chain.
3) Price
Similar to a commercial loan, PO financing costs dollars and cents. The borrower has to pay a fee in exchange for the financial support. This is what has led some to consider PO funding as mainly effective when used for large, high margin transactions.
How to qualify for PO Financing
The approval criteria for purchase order finance can depend on the business. Most finance companies are reluctant to provide funding unless the applicant has an immaculate credit score, whereas Setscale takes a more rounded, holistic approach. If you have a proven track record, we believe we can help you identify opportunities across your value chain.
That said, it’s important to always include enough detail in your application — this makes the process smoother for everyone involved. Here’s a list of the information you are encouraged to provide when applying for PO finance, in order to assess risk and viability for the loan.
- Company information
- Supplier information
- Buyer’s purchase order
- Supplier order
- Payment terms
- Financial statements
- Company and client credit information
If your information is sufficient and legitimate, we can get started. Once your application is successful, all that’s left is to sign a transactional joint venture agreement and confirmation letter before you can receive funding.
How Setscale’s PO finance empowers your growth
At Setscale, we pride ourselves on helping small to medium-sized businesses reach the next level. Our team’s rich experience building businesses from the ground up has taught us that, when the situation is uncertain, you need support from someone who understands your potential. That’s why we offer a flexible purchase order funding solution that gives fast and easy access to capital, zero monthly fees and no interest.
With our simple and clear funding process, you can start scaling when you’re ready to grow. Where other financing companies might make your credit score the bottom line, we work with a range of businesses of different sizes, backgrounds and situations, supporting them to achieve growth when they’re ready for it.
Our holistic approach considers more than just your credit score, and we believe in creating long-term partnerships and opportunities for our clients, so we can help them get back to focusing on what they do best.
Find out more about our purchase order finance solution today. You can also browse our further insights on the topic and read our FAQs in our Resource hub.
