Purchase Order Financing: Explained

You might be a startup, a small business on your way to bigger things, or a larger business looking to reach the next level. Liquidity is a necessity for all business types and sizes to achieve growth, and fulfilling open purchase orders often serves as a major challenge. 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 financing purchase orders, you can find out all you need to know right here. Let’s get started.

What is Purchase Order Financing?

Increased customer demand is always a good thing, but if a company has a limited amount of cash to spend on fulfilling existing customer orders, it makes meeting that 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 option is designed to let a company deliver on its existing purchase orders, without sacrificing further opportunities to grow, by meeting increasing customer 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 businesses 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 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 to provide you with capital required to make this happen. Here’s how the process works:

  1. Business applies for PO funding
  2. If approved, the PO funding provider pays manufacturer
  3. Manufacturer makes/sends the product to the customer
  4. Funding provider invoices customer
  5. Customer sends payment directly to funding provider
  6. Funding provider deducts fee from payment, before sending remaining balance back to client

Now that the liquidity issue 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 financing 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 72 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) Increased Growth

PO finance supports businesses with the financial management of supply chain and cash flow. By taking care of associated liquidity problems, you can pour your energies into bringing in additional revenue through other channels. This could be sales, marketing, product development or by other means.

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 PO financing can depend on the business. Most financing providers 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.

  1. Company information
  2. Manufacturer/supplier information
  3. Buyer’s purchase order
  4. Manufacturing order
  5. Financial statements

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.

PO Financing Rates

The cost of PO financing will vary depending on the provider and the size of the transaction. The typical percentages are between 3 and 5% per month, but each PO financer structures its solution differently.  For many PO financers,  the main factors influencing rates include:

  1. Creditworthiness of buyer / supplier
  2. Size and volume of order
  3. Order risk profile
  4. Market conditions

At Setscale, we pride ourselves on helping small to medium-sized businesses reach the next level. That’s why we offer a flexible purchase order funding solution that gives fast and easy access to capital, with no upfront fees or monthly interest.

How Setscale’s PO finance empowers your growth

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. 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 PO financing solution today. You can also browse our further insights on the topic and read our FAQs in our Resource hub.

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