Purchase Order Financing for Small Businesses: Explained

Small business owners know grit and perseverance. Exciting as it may be, starting and growing a business is tough, and cash flow challenges are commonplace—even when demand is increasing. As a result, many business owners seek financial support to keep moving forward.

However, securing enough capital to maintain growth can be especially difficult for small businesses. The mainstream option—small business loans—are not always the most accessible or suitable. Instead, many turn to purchase order (PO) financing as a flexible alternative solution for small businesses during their critical growth stages. Find out all you need to know in our guide here.

Small Business Struggles

Scaling up is hard, and the early years of a business are filled with unique challenges. Across sectors, many founders will start out in a fast-paced and unpredictable environment with limited capital.

On top of this, small business capital can be especially difficult to secure. While every small business is different, there are particular challenges that many face and it’s important that they recognise they’re not alone in tackling these hurdles.

Common Small Business Funding Challenges

Cash flow shortages

Outstanding customer payments, expensive borrowing, and difficulty controlling growth all lead to many small businesses burning through cash and, indeed, turning down orders. These issues may also leave the business less attractive to conventional lenders, meaning they can’t access the capital they need to manage these challenges.

Access to financing

Commercial loans are helpful, but many growing businesses struggle to meet traditional banks’ strict eligibility criteria. They will often deny funding to younger businesses with limited credit history, explaining that without it, it is impossible to complete a proper assessment of the business’s creditworthiness. This puts small businesses in a difficult ‘chicken and egg’ situation where they can’t build their creditworthiness without access to capital.

Supply chain management

Keeping operations running smoothly often comes down to managing the supply chain efficiently, but this can be an uphill battle for smaller businesses, especially during the current period of supply chain difficulty. Compared to larger businesses, they may have fewer resources and much less bargaining power, which can lead to increased supply costs.

What is PO Financing?

PO financing is an alternative solution to commercial loans that smaller businesses can use to fill open customer orders they are unable to complete because of capital constraints. 

A large purchase order can be both exciting and daunting. While it is an opportunity for more revenue and growth, small businesses often find that they simply don’t have enough working capital to complete the order and maintain operations. Consequently, they may have no choice but to turn it down, which can be a huge loss financially and extremely disheartening for the business operator.

With PO financing, a third-party steps in to help the brand finance its supply chain and meet demand. The finance provider directly pays suppliers to manufacture and ship orders to the end-customer, allowing the business to always say ‘yes’ to big orders, and to focus on scaling up.

How Does PO Financing Work?

When seeking help from a PO finance provider, businesses need to already have the open purchase order the customer has submitted. From there, the process usually follows these steps:

  1. Business applies for PO financing
  2. If approved, the PO financer pays the supplier to complete the order
  3. Supplier makes/sends the product to the customer
  4. Business invoices customer
  5. Customer sends payment directly to the PO financer
  6. PO financer deducts fee from payment, before sending remaining balance back to client

How PO Financing Supports Small Businesses

Capital access

As we’ve explored, small businesses often find it hard to obtain financial support from traditional banks. Bank loans involve a time-consuming application process, and limited credit history is often a disqualifying factor. PO financing is more accessible, and often involves a quicker turnaround without the need for lengthy and limiting credit checks.

Funding growth

PO financing helps small businesses maintain momentum by supporting them with financial management. Where previously they may have had to compromise between liquidity and seizing new opportunities, the PO financer covers the immediate cost of production and allows the business to capitalize on increasing demand.

Supplier relationships

With PO financing, the supplier receives payment directly from the third party to complete orders, meaning they do not have to wait for funds to manufacture and deliver the product. Upfront payments help the business then build trust with its suppliers, improving the business’s negotiating position in the long run.

The Cost of PO Financing

The expense of PO financing depends on the size of the purchase order and the provider’s lending terms. Some may look at a business’s credit history, or charge monthly interest in the period between providing the funding and receiving end-buyer payment.

At Setscale, we understand how important flexibility is for small businesses trying to scale. That’s why our financing approach is holistic, assessing more than just credit score. Our non-dilutive solution does not involve an upfront payment or monthly interest payments.

Apply for Small Business PO Financing

The application process for PO financing is significantly less arduous than when applying for a commercial loan. Still, PO financers will request the at least some of following information from customers in order to build out the payment terms that make sense for the business and transaction:

  • Company information
  • Supplier information
  • Buyer’s purchase order
  • Supplier order
  • Payment terms
  • Financial statements
  • Company and client credit information
  • Tax documents

Do I Qualify?

At Setscale, 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)

After underwriting is complete, you will need to sign a few electronic documents as part of our digital onboarding process.

Get Flexible Financing With Setscale

At Setscale, being a small business we understand the challenges that small business owners face. This gives us the insight into creating the right, flexible financial support for businesses trying to scale — and that’s why we don’t get paid until you do.

Get started today by filling in a request form—if you’re a good fit for our PO financing, we’ll get back to you. Visit our Resources Hub for more information on our financing solutions, and industry insights.

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