What is Purchase Order Financing?
Purchase order financing is a funding option that’s available for small businesses who require working capital to purchase products and materials. Purchase order financing is generally considered a short-term financing option, but its distinct advantages make this type of financing appealing for smaller businesses. So, what exactly is purchase order financing and how does it work?
Purchase Order Financing: The Basics
Purchase order financing, or PO funding, is a type of loan used to pay suppliers for verified purchased orders. One of the many challenges faced by startups is growth. As a startup grows, it may accept large orders — more than what the startup is able to fulfill on its own. Purchase order financing provides startups and small businesses with the funds it needs to fulfill these orders.
Cash Flow Problems?
Lack of consistent cash flow is an all-too-common problem among small businesses. If you don’t have enough money to fulfill new orders, you’ll have to turn prospective customers — and that’s never a smart way to run a business.
With purchase order financing, however, you can continue operating your business and fulfilling new orders. This funding option involves one company that pays the supplier of another company, covering the cost of products that have been ordered by customers. Purchase order financing is a type of advance funding, and it may or may not cover the entire amount needed to fulfill the order or orders.
Purchase Order Financing vs Traditional Loan
You might be wondering how PO funding differs from a traditional loan. For starters, traditional loans often require collateral and several years of financial statements. Lenders want to know the borrower can repay the loan, so they’ll scrutinize credit history and financial statements to determine an applicant’s candidacy.
Purchase order financing is an alternative form of funding that focuses on orders instead of traditional factors like credit history and past finances. The key benefit to purchase order financing is that it doesn’t require an amazing credit history. As long as you can show that your business has verified orders, and that’s doing relatively well, you should have little-to-no problem acquiring purchase order financing.
In terms of cost, purchase order financing varies depending on the transaction. It’s usually a monthly percentage that’s defined in the contract. For instance, it’s not uncommon for a borrower to pay 3-6% of the sale amount for the first 30 days, after which the cost may increase as determined in the contract.