What Is Purchase Order (PO) Financing?
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Purchase Order Financing Definition
How Purchase Order Financing Works
Who Uses Purchase Order Financing?
Startups Business owners with low credit scores Wholesalers Distributors Resellers Importers/exporters of finished goods Outsourcers Government contractors who are fulfilling government orders Companies with seasonal sales
Purchase Order Financing Pros and Cons
Enables you to take customer orders you otherwise could not fulfill Purchase order financing allows you to serve customers despite seasonal dips in cash flow and/or take on an unusually large order from a customer. Can be easier to get than other types of business loans While PO financing companies will look at your business’s financials and credit history, they are typically more interested in the creditworthiness of your customers and the reputation of your supplier. As a result, it can be easier for startups and businesses with less-than-stellar credit to qualify for PO financing compared with other types of business funding. You don’t need to make regular loan payments. Since PO financing is more of a cash advance than a loan, you won’t need to pay the money back in regular installments like you would with a regular term business loan.
Can be costly PO financing fees may seem relatively low at first glance, often ranging between 1% and 6% of the total supplier’s costs per month. But when that rate is converted into an annual percentage rate (APR), they are actually fairly high, potentially 20% to 50%-plus. Cost depends on your customer Since fees are charged per month, how much you will end up owing the PO financing company will depend on how long it takes your customer to pay their invoice. This can make it difficult to estimate the total cost upfront. You’re cut out of the process With this type of financing, the lender and supplier often take over most of what you normally do. In many cases, the lender will pay the supplier, the supplier will ship the product to the customer, and the customer will pay the lender. As a result, you won't have the usual amount of quality control.
Typical Purchase Order Financing Rates
Applying for Purchase Order Financing
Have a purchase order of $50,000 or more Sell finished goods (not parts or raw materials) that you don’t make yourself Sell to business-to-business (B2B) or business-to-government (B2G) customers Have profit margins of at least 20% Have creditworthy customers (some lenders will conduct a detailed credit check on your customers) Have reputable and trustworthy suppliers The customer’s PO Your supplier’s invoice Your invoice to your customer Your purchase order to your supplier Information about your business Financial statements (such as your balance sheet, income statement, and cash flow statement) Tax returns
Alternatives to Purchase Order Financing
Small Business Loans
Merchant Cash Advances
Business Lines of Credit
Compare Small Business Loan Rates
Frequently Asked Questions
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