Does PO Funding Make Sense for Your Business?
Cash Against Documents & Vendor Guarantees: Low Cost Import Funding Tools
Purchase order (PO) financing or trade financing is a type of creditor advance used to pay suppliers for items that 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.
To qualify for PO Financing, your business sells finished goods to commercial (B2B) or government (B2G) customers and earn a profit margin of at least 20% in order to qualify for purchase order financing. Due to the creditworthiness of your customers and suppliers, as well as 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 being accepted increase significantly.
This enables you to finance payments to suppliers for manufacturing and transportation prior to 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 the purchase of specific goods to meet a customer’s request.
Bankers Factoring is proud to also provide A/R Factoring or Accounts Receivable Factoring for clients with invoices for goods or services completed and delivered. To learn more about our A/R Factoring program, visit Why Companies use A/R Factoring.
Exactly 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 who are involved at various stages:
Borrower: Small business seeking financing lines.
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 goods that are resold. The purchase order finance company makes direct payment to the supplier.
Customer: The borrower’s customer, as well as the ultimate beneficiary of the order, is identified here. In most cases, customers who use PO financing make their payments directly to the PO financing provider via the created invoices being factored. Bankers Factoring offers both PO funding and non-recourse A/R factoring.
Due to the large number of parties involved, it may be a complex to complete the financing without the support of an established PO funder/factor like Bankers.
To learn more about PO Financing, visit our example of Wholesale Trade Importing.
The PO Financing Process
The following are the eight steps involved in a purchase order financing transaction:
Step 1: Your company receives a large purchase order from a customer.
Step 2: You will receive a formal cost proposal, which will include the following information: An itemized written proposal outlining the costs of procuring the commodities required to fulfill the request is submitted by the supplier. You can now make an informed decision about whether or not additional funding is required.
Step 3: Purchase order financing is applied for and approved in the following ways: As soon as you have determined that PO financing is required, you will need to find the most appropriate purchase order financing company, submit an application 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 in order to be considered for evaluation.
Step 4: The supplier is compensated by the PO finance company 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 basically offering export finance for your vendor.
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 right after. We smooth the gears of global trade.
Step 5: The following items are delivered to the customer by the supplier: The items are delivered to the buyer directly by the supplier. When the products are delivered to the customer, the order is deemed to have been accepted.
Step 6: You extend credit to the customer: You send the customer an invoice for the products and tell them that they have credit available to them. When a customer’s payment is delayed, the cost of purchase order financing rises as well.
Step 7: The Invoice(s) created are then factored by Bankers Factoring who uses the factoring proceeds to “take out” the balance owed on the purchase order funding.
Step 8: Once your customer, the account debtor, pays Bankers Factoring you are wired the earned reserve minus the receivable factoring fees.
To learn more about PO Financing, visit our previous article Trade Financing with Bankers Factoring.
Who Can Use PO Financing?
Most businesses that rely on external suppliers to provide resale products have the option of using 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 their inventory levels. Using purchase order financing, distributors can keep a higher level of inventory on hand while offloading some of the transportation costs that are reducing their available 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 they have established a customer relationship, they can reduce some of the risk associated with stocking products in their warehouses.
Resellers: The inventory of resellers may be reduced, particularly during the initial stages of their operations, in order to free up working capital for other expenses such as rent and wages. The use of PO financing instead of traditional inventory management can assist the reseller in increasing their cash flow while also expanding their customer base.
Importer or exporters of finished goods: Transportation costs are extremely high in international trade for both importers and exporters of finished goods. By financing a purchase order, they can avoid tying up their funds while the products are being 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 facilitate their business expansion. In lieu of locking away capital during the manufacturing process, your company can reinvest in itself and finance the supply and delivery of products.
When PO Financing Makes Sense
Purchase order financing has proven to be a highly 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 not enough cash on hand. Purchase order financing can assist businesses in managing their cash flow while also providing owners resources to drive growth.
- The use of purchase order financing can be a cost-effective method for businesses to expand while still meeting customer demand.
- Businesses wishing to save money on shipping: Businesses that work with international suppliers may be required to pay for items before they can bill a customer 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 small businesses with lines of working capital from $25,000 to $10 million. 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
Through purchase order financing, you can receive up to 100% of the cost of items sold in as little as two weeks after submitting an application to execute a purchase order. It is necessary for a business to sell at least $25,000 in tangible goods with a minimum profit margin of 20% in order to be considered for this program.
Summary of 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 provides our clients the ability to procure large amounts of a product without putting up the cash. Bankers will issue a letter of credit or cash against documents (CAD) to your suppliers within two to four weeks in the majority of cases. It is necessary to submit a copy of your customer’s purchase order along with documentation from your supplier indicating the cost of fulfilling the order when filing your application. Consider how long it will take your supplier to manufacture or deliver the goods after they have been paid, as the longer it takes, the more expensive the financing will be. If you do not consider this, you could end up paying more for your financing.
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 time frame.
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 a simple process. Bankers Factoring tailors PO financing solutions for our clients in startup mode, rapid expansion, and importing. In order 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 %
- Both the customer and the vendor must be creditworthy, which is 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. A company such as Dun & Bradstreet can be used by a variety of loan providers to conduct a commercial credit check on your customers. Customers and suppliers should, at a bare minimum, 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 that have unpaid B2B or B2G invoices can benefit from invoice factoring or accounts receivable factoring (AR factoring). Bankers Factoring advances up to 90% of the invoice value and even occasionally collect invoices directly from your clients, according to industry standards. 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.
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 in order 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.