What Is Purchase Order Financing? And How, Exactly, Can it Help Out Your Business?
When it comes to business financing with a low credit score, purchase order financing can be a good option.
And why does purchase order financing (also called PO financing) matter? Seasonal sales, business growth and expansion, and large orders can all restrict your business cash flow.
The reason for this is that many clients want to pay on terms of net 30 or 60. But at the same time, many of your suppliers demand payment on delivery.
Yet at the same time you have to cover other expenses including shipping, labor costs, materials, packing, and many more. These expenses will all further restrict your cash flow.
This type of financing helps to free up your cash flow so you can grow your business and your profits.
You can get funds based on outstanding orders with your company’s existing clients. This puts PO financing into the general realm of financing based on collateral.
The Specifics of Purchase Order Financing
While a bank looks at your company’s finances, these loans instead focus on the financing and credit of your customers. As a result, this means you can get this type of financing even if you have damage to your personal or business credit profiles.
There are a few different types of purchase order financing currently available to help you and your business. One option that is available right now is to get funds. These funds are paid directly to your suppliers.
You can receive advances up to 100% of the purchase cost to your supplier. The bank will then pay your supplier and you get immediate access to your goods.
The bank will collect the invoice payments from your client. And it will also pay you the balance between the order value and the amount paid to your supplier.
You receive the net total minus any fees once the creditor receives payment.
Helping Maintain a Relationship With Your Customers
PO financing is a terrific way to enhance and maintain relationships with your customers. By being able to give them more time to pay you back (and without them suffering some sort of a penalty), you make their commercial experience with you far more pleasant. And then, all other things being equal, they are far more likely to choose you, rather than one of your competitors.
How Do Letters of Credit Work?
So, a second purchase order financing option is to issue a letter of credit to your suppliers.
A letter of credit is a commitment to pay the supplier on their fulfillment of certain conditions. The conditions are normally related to the supplier providing necessary documentation. Governance for these Letter of Credits also comes from the regulations of the International Chamber of Commerce.
What is a Supplier Guarantee?
Plus, a third option is a Supplier Guarantee. This is a commitment to pay the supplier from the available cash. This cash comes from the funding of the receivables relating to the purchase transaction.
The amount of purchase order financing available to you will depend on the volume of outstanding purchase orders you have.
It is very practical to get over $500,000 in financing if you have that amount or greater in orders.
Funds can commonly be delivered within a week after approval, and interest rates and terms are often very good.
Takeaways for Purchase Order Financing
There are lots of ways to get financing for your business, and PO financing is but one of them. And its biggest benefit may very well be that it can help you to offer better terms to your customers and prospects. And you will be able to do so without damaging your business credit or harming your relationships with your suppliers. This makes it a win-win a lot of the time.
PO financing can help your business in several different ways. But is it truly right for you? Find out today!
