Does PO Funding Make Sense for Your Business?
Table of contents
- Does PO Funding Make Sense for Your Business?
- Cash Against Documents & Vendor Guarantees: Low-Cost Import Funding Tools
- Qualifying for PO Funding
- What is Purchase Order Financing, and how can it work for you?
- The PO Financing Process
- What is Cash Against Documents?
- Who Can Use PO Financing?
- When PO Financing Makes Sense
- PO Financing Structure: Rates, Terms, Qualifications, and Requirements
- Purchase Order Financing Terms and Conditions
- Purchase Order Financing Fees and Interest Rates
- Purchase Order Financing Alternatives
- PO Funding Summary
- Ready for the owner-employees of Bankers Factoring to fix your cash flow problems through purchase order funding plus invoice factoring? Call 866-598-4295 or go to Bankers-Factoring-Application.
Cash Against Documents & Vendor Guarantees: Low-Cost Import Funding Tools
Purchase order (PO) financing or trade financing is a type of creditor advance for paying suppliers for items your business sells, resells, or distributes to your customers. Purchase order financing is an excellent way to accelerate business growth without taking on balance sheet debt or selling company stock or equity. Bankers Factoring provides PO financing (funding) solutions to clients whose purchasing demands exceed cash flow at rates cheaper than a credit card.
Qualifying for PO Funding
To qualify for PO Financing, your business sells finished goods to commercial (B2B) or government (B2G) customers and earns a profit margin of at least 20% to qualify for purchase order financing. Due to the creditworthiness of your customers and suppliers and your business relationship with them, purchase order financing is available to small businesses. If your customers and suppliers are well-known, reputable businesses, your chances of acceptance increase significantly. As a small business owner, your relationship with your customers and vendors matters a great deal. Please read our article on PO funding for small business.
This enables you to finance payments to suppliers for manufacturing and transportation before receiving payment from your customers by utilizing purchase order financing. For example, in contrast to other types of traditional financing, you are prohibited from using the funds for any purpose other than purchasing specific goods to meet a customer’s request.
Bankers Factoring is proud to provide A/R Factoring or Accounts Receivable Factoring for clients with invoices for goods delivered. To learn more about our A/R Factoring program, visit Why Companies use A/R Factoring.
What is Purchase Order Financing, and how can it work for you?
In the purchase order or trade financing process, there are at least four parties involved at various stages:
Client Needing Funding: Small business seeking financing lines or business loans.
Purchase order financing company (Bankers Factoring): The purchase order financing organization assesses the order and provides funding to the supplier on time.
Supplier: It is the entity that provides the borrower with the resold goods. The purchase order finance company makes direct payments to the supplier.
Customer: The borrower’s customer and the ultimate beneficiary of the order. In most cases, customers who use PO financing make payments directly to the PO financing provider via the factored invoices. Bankers Factoring offers both PO funding and non-recourse A/R factoring.
Due to the large number of parties involved, it may be complex to complete the financing without the support of an established PO funder/invoice factor like Bankers Factoring.
The PO Financing Process
These are the eight steps involved in a purchase order financing transaction:
Step 1: Your company receives a large purchase order from a customer, for example, Dollar General.
Step 2: You will receive a formal cost proposal, including the following information: An itemized written proposal outlining the costs of procuring the commodities required to fulfill the request, which the supplier submits. You can now make an informed decision about whether you require additional funding.
Step 3: Application and approval of purchase order financing goes like this: As soon as you determine that you require PO financing, you will need to find the most appropriate purchase order financing company, apply for the funds you require, and wait for the approval. You must submit both the customer’s purchase order and the supplier’s cost proposal for evaluation.
Step 4: The PO finance company compensates the supplier in the following ways: Upon approval and the proper documents to the importer, Bankers Factoring, the purchase order financing company pays your supplier to manufacture and deliver the products necessary to complete the purchase order’s fulfillment. Besides funding for you, you are offering export finance for your vendor.
What is Cash Against Documents?
Cash Against Documents or a Vendor Guarantee is the low-cost and preferred way for Bankers Factoring to fund your purchase orders, knowing we will also factor your invoices immediately. We smooth the gears of global trade via trade financing. Cash Against Documents or CAD is one of the cost-effective alternatives to purchase order funding.
Step 5: The supplier delivers the following items to the customer: The supplier delivers the items directly to the buyer. The order is deemed accepted when the products are delivered to the customer.
Step 6: You extend credit to the customer: Send the customer an invoice for the products and tell them they have credit available. When a customer’s payment is delayed, the cost of purchase order financing rises as well.
Step 7: Bankers Factoring then buy your invoice(s) and uses the factoring proceeds to “take out” the balance owed on the purchase order funding.
Step 8: Once the account debtor or your customer pays Bankers Factoring, we wire the earned reserve minus the receivable factoring fees.
To learn more about PO Financing, visit our previous article Trade Financing with Bankers Factoring about how PO funding and invoice factoring work together.
Who Can Use PO Financing?
Most businesses that rely on external suppliers to provide resale products can use PO financing. PO Financing with Bankers Factoring frees up our client’s cash flow to grow their business with existing or new customers.
Below are some businesses that benefit from Purchase Order (PO) Financing:
Distributors: Distributors can lower their upfront costs during peak seasons while still meeting buyer demand for high-margin products by reducing inventory levels. Distributors can use purchase order financing to keep a higher inventory level on hand while offloading costs that reduce cash flow.
Wholesalers: Profiting from increased client demand without depleting their cash reserves or incurring inventory losses is a viable option for wholesalers. If wholesalers can finance the purchase and delivery of products after establishing a customer relationship, they can reduce the risk associated with stocking products.
Resellers: The inventory of resellers is reduced, particularly during the initial stages of their operations, to free up working capital. PO financing can assist the reseller in increasing their cash flow while expanding their customer base.
Importers or exporters of finished goods: Transportation costs are high in international trade for importers and exporters of goods. By financing a purchase order, they can avoid tying up their funds while the products are delivered to the customer.
Outsourced manufacturers: If outsourced manufacturers are cash-strapped but still have a significant demand for their products, PO Funding can help. Without tying up capital during the manufacturing process, your company can reinvest and finance the supply and delivery of products.
When PO Financing Makes Sense
Purchase order financing has proven to be an effective method of financing your company’s growth, particularly in the following situations:
- Increased demand for your product or service: Purchase order financing makes a lot of sense if your company has signed a new customer with large orders and the demand for your products has increased dramatically.
- Cash flow constraints: Many small businesses experience cash flow problems at various points throughout the month with insufficient cash on hand. Purchase order financing can assist businesses in managing their cash flow while providing owners with resources to drive growth.
- Using purchase order financing can be a cost-effective method for businesses to expand while still meeting customer orders.
- Businesses wishing to save money on shipping: Businesses that work with international suppliers may be required to pay for items before they can bill customers for their services. To avoid your capital being committed to a single transaction, you can finance your purchase orders and use the funds to invest in other aspects of your business.
Bankers Factoring, a PO Financing and A/R Factoring company, provides working capital from $25,000 and up. Obtaining approval and funding can be accomplished in as little as two weeks and completed 100% remotely. Contact us to learn more about PO Funding.
Visit our PO Financing Spreadsheet, to learn if your deal makes sense for you and Bankers Factoring.
PO Financing Structure: Rates, Terms, Qualifications, and Requirements
You can receive up to 100% of the cost of items sold after applying. To execute a purchase order through purchase order financing. To be considered, you must sell at least $50,000 in tangible goods with a minimum profit margin of 20%.
Summary of PO Funding terms, costs, and requirements
The following are the typical costs, conditions, and qualification requirements of a purchase order finance company:
|Financing Amount||Up to 100% of the cost of goods to fulfill the purchase order|
|Time for Supplier Payment||Up to 2 weeks on domestic transactions; up to 4 weeks on international transactions|
|Repayment Terms||90 days or less|
|PO & Factoring Rates||1.25% to 3% per month|
|Minimum Funding||At least $15,000|
|Borrower Qualifications||B2B or B2G business selling tangible goods with 20% or greater profit margins|
|Customer & Supplier Qualifications||Both parties in a transaction need to be creditworthy.|
Purchase Order Financing Terms and Conditions
Bankers Factoring PO Financing allows our clients to procure large amounts of a product without putting up cash. Usually, financial institutions will issue a letter of credit or cash against documents (CAD) to your suppliers within two to four weeks. When filing your application, you must submit a copy of your customer’s purchase order and documentation from your supplier indicating the cost and payment methods of fulfilling the order.
Consider how long your supplier will take to manufacture or deliver the goods after they have been paid; the longer it takes, the more expensive the financing will be. You could pay more for your financing if you do not consider this.
Purchase Order Financing Fees and Interest Rates
The cost of financing a purchase order is determined by the volume of the transaction as well as the level of risk of your deal. Our PO financing rates competitively vary between 1.25% and 6% on a monthly basis across many industries.
Estimated Purchase Order Financing Fees and Charges
|PO Financing Amount||$100,000|
|First Month Cost||$3,000 (3%)|
|Second Month Cost||$2,000 (1% per 10 days)|
When your supplier receives the funds, the loan period begins to accrue. It may be necessary to use PO financing if your supplier is late with the creation or delivery of goods or if you have extended payment terms to your customer beyond the standard 30-day period.
Purchase Order Financing – What You Need to Know
If you work with established and trustworthy clients and suppliers, qualifying for purchase order financing should be simple. Bankers Factoring tailors PO financing solutions for our clients in startup mode, rapid expansion, and importing.
To qualify for purchase order financing, you must possess the following characteristics:
- B2B (business-to-business) or B2G (business-to-government) customers
- Physical goods that have been completed and are intended for sale.
- Based on the credit source, the minimum profit margin can range from 20% to 30 %
- The customer and the vendor must be creditworthy, defined by Dun & Bradstreet (D&B) as having a long and successful credit history.
Bankers Factoring provides credit protection and risk management for our clients. Various loan providers can use a company such as Dun & Bradstreet to conduct a commercial credit check on your customers. At a bare minimum, customers and suppliers should have a track record of timely payments, no recent bankruptcies, and no significant litigation on their hands. We work hard to ensure your business growth is protected.
Purchase Order Financing Alternatives
Businesses with unpaid B2B or B2G invoices can benefit from invoice factoring or accounts receivable (AR factoring). According to industry standards, Bankers Factoring advances up to 90% of the invoice value and even occasionally collects invoices directly from your clients. A/R Factoring is an optimal solution for companies struggling with cash flow in distressed situations.
To learn more about A/R Factoring, visit our previous article How Invoice Factoring Works.
PO Funding Summary
We hope this guide helps you with how purchase order financing works. PO funding or Trade Financing is an option if your company’s sales growth exceeds its cash flow. It can cost more than a bank loan, but you can get 2-10 times higher availability than a bank loan. We recommend that you have profit margins of at least 20% and an industry track record of dealing with customers and suppliers to obtain the best pricing.
Bankers Factoring offers rates that are competitive with the industry on orders ranging from $25,000 to $10 million. Apply for purchase order financing today.