PO Financing: Turn Orders Into Cash Fast

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PO Financing and Inventory in Canada: A Reality for Growing Businesses

It’s not a myth or urban legend. Financing inventory and purchase orders in Canada is actually possible, and in most cases, the cost of this financing is significantly offset by your firm’s ability to increase sales, generate additional profits, and reduce competitive pressure.

PO financing for large orders enables businesses to accept and fulfill a large order, even when cash flow is tight, so PO financing covers supporting operational capacity and helping you grow your business.

The bottom line is, of course, more and larger orders and contracts—in some cases from clients you were not able to satisfy in the past based on your financial strength or other challenges—with large orders PO financing providing the support you need to grow your business.

From Order to Opportunity: Breaking the Cash Flow Barrier

You've landed the contract of your dreams, but your bank account tells a different story.

Without sufficient working capital, promising purchase orders become painful reminders of missed opportunities.

Let the 7 Park Avenue Financial team show you how PO financing transforms your confirmed orders into immediate funding, allowing you to fulfill contracts that would otherwise slip through your fingers due to cash flow constraints.

Understanding Inventory Financing Fundamentals

Let’s step back a bit and define some of our key metrics. In its simplest form, the financing of inventory is simply your ability to finance, or rather, “margin” inventory on an ongoing basis.

Clients talking to us about seeking specialized inventory financing are often in the position of having inventory form a large part of their current assets, in conjunction with accounts receivable, of course.

It is important to maintain a proper account for both inventory and receivables as part of the financing process, ensuring accurate documentation and transaction review.

So in a perfect world, you go to your Canadian chartered bank and ask them to finance your inventory and free up cash flow. It’s that simple, right?

Understanding the process of inventory financing, including account setup and required documentation, is crucial for success.

The Reality of Traditional Bank Financing

We can hear you already in the background, and we’ll be the first to admit it’s not a perfect world.

Even seasoned Canadian business owners and financial managers realize that inventory is not high on the list of bank financing in Canada, especially if you are a small or medium-sized firm that does not have the bench strength to satisfy typical Canadian chartered bank requirements, as banks often have strict approval processes.

Approval from banks is often based on stringent criteria, making it difficult for small and medium-sized businesses to qualify.

These criteria focus around everything except inventory—i.e., ratios, covenants, external collateral, personal guarantees, etc.

Prerequisites for Successful Inventory Financing

For inventory financing to make sense, you should realize that your inventory has to be marketable; it can’t be old, stale, and slow moving.

You also have to be in a position to demonstrate the value of your inventory to potential financiers, show that your inventory turns regularly, and that you have sufficient gross margin to carry the financing costs associated with financing inventory and financing purchase orders.

It is also important to provide proper documents to support the value and eligibility of your inventory for financing.

Understanding Purchase Order Financing

P.O. financing is, of course, the “kid sister” to inventory finance, and such a facility contemplates direct payment to your suppliers by the P.O. financier, allowing you to, of course, satisfy supplier payment amounts and terms while at the same time fulfilling client orders and contracts.

To understand how PO financing works, it's important to know the roles and steps involved in a typical purchase order financing work or order financing work transaction.

When a buyer places a PO (purchase order) with a seller, the seller may need funding to cover the supplier's costs required to fulfill the order.

Finance companies offer services that fund purchase orders by providing quick access to money, enabling the seller to manage large deals and deliver goods on time. The lender, often a finance company, pays the supplier directly—sometimes using a letter of credit as a financial instrument to guarantee payment once the goods are delivered.

After the customer receives the goods, they are invoiced, and the customer pays the financing company, which then pays the seller. This process helps businesses by paying suppliers upfront, supporting growth without the delays of traditional loans or short-term loans. Interest is charged only on the amount of funding used, so businesses pay interest only on what they borrow.

Approval for PO financing is typically based on the creditworthiness of both the buyer and the seller, rather than the business itself. The transaction involves the exchange of money and documents, making proper documentation essential.

A representative from the finance company can assist with the application, provide guidance, and help ensure a smooth approval process.

Benefits of Using Purchase Order Financing

Purchase order financing offers a powerful solution for businesses looking to grow without putting undue strain on their cash flow.

By leveraging purchase order financing, companies can fund large orders and pay suppliers directly, even when they lack the upfront capital to do so.

This means businesses can confidently accept and fulfill bigger orders, knowing that supplier costs are covered and working capital is preserved for other critical expenses.

With purchase order financing, businesses can manage their cash flow more effectively, ensuring they have the funds needed to deliver products to customers on time.

This not only helps maintain strong relationships with clients but also reduces the risk of missed opportunities due to financial constraints.

The ability to fulfill large orders without delay can lead to increased revenue, improved reputation, and a stronger competitive position in the market.

Additionally, purchase order financing allows companies to take on new contracts and expand their operations without the need for long-term debt or equity dilution.

By using this flexible financing solution, businesses can cover supplier costs, manage expenses, and fulfill customer orders efficiently, all while maintaining control over their finances and supporting sustainable growth.

Who Uses Purchase Order Financing

Purchase order financing is a valuable tool for a wide range of businesses, from startups and small enterprises to established companies dealing with large clients or government contracts.

It is especially beneficial for businesses that sell products to other companies or public sector organizations, where fulfilling large orders can put significant pressure on working capital.

Companies that act as re-sellers, distributors, or suppliers of hard goods often turn to purchase order financing to bridge the gap between receiving a purchase order and collecting payment from the customer.

This financing solution is ideal for businesses that have secured a purchase order from a creditworthy client but lack the funds to pay suppliers and fulfill the order.

By accessing purchase order financing, these businesses can ensure timely delivery, manage expenses, and free up cash for other operational needs.

Whether a business is looking to take on larger orders, expand its customer base, or simply manage cash flow more effectively, purchase order financing provides the flexibility and support needed to grow.

It enables companies to fulfill bigger orders, pay suppliers promptly, and ultimately increase revenue without being held back by limited capital.

The Cost of Financing

The cost of purchase order financing is an important consideration for any business evaluating this solution.

Typically, a purchase order financing company will charge a fee that ranges from 1% to 3 % of the supplier’s costs per month. This fee is generally deducted from the payment received from the customer, with the remaining balance paid to the business once the order is fulfilled.

Several factors can influence the cost of purchase order financing, including the creditworthiness of the customer and supplier, the size and complexity of the purchase order, and the terms set by the finance company.

Businesses should carefully review the terms and fees associated with each financing offer to ensure it aligns with their cash flow needs and overall financial strategy.

By understanding the costs involved, companies can make informed decisions about how to manage their finances and maximize the benefits of purchase order financing.

This allows businesses to cover supplier costs, fulfill large orders, and grow their operations while keeping expenses under control.

Alternative Financing Solutions

So if the bank is not your best bet, how are these two asset categories financed? The reality is that they are financed by specialized firms.

Finance companies provide a range of services and funding options beyond what traditional banks offer, supporting businesses with flexible solutions tailored to their needs.

In the case of inventory pure-play financing, we encourage clients to bundle their inventory financing with a full asset-based lending line of credit via a nonbank private finance firm.

This type of facility margin both inventory and A/R to maximum leverage, giving you, in essence, unlimited working capital to grow.

Qualification Requirements

To qualify for financing inventory and financing purchase orders, you should generally have solid management and industry experience, good accounting and reporting around your inventory, as well as the aforementioned marketable product that can be resold by the financier if a problem arises.

It is also important to submit all necessary documents to support your application, as proper documentation is a key part of the process. The approval process will depend on the quality of your documents and your ability to meet the financier's criteria.

Maintaining a healthy financial position is essential for any business, especially when managing large orders and fluctuating cash flow.

Purchase order financing can play a key role in supporting working capital by providing the funds needed to pay suppliers and deliver products to customers. However, businesses need to take a holistic approach to financial management.

In addition to purchase order financing, companies should consider other financing options such as lines of credit, invoice financing, and invoice factoring.

Diversifying financing sources can help reduce risk and provide greater flexibility in managing accounts receivable, payments, and expenses.

Regularly reviewing financial statements, monitoring accounts, and ensuring the timely collection of invoices are also critical steps in maintaining strong cash flow and minimizing reliance on any single financing solution.

By proactively managing their finances, businesses can ensure they have the capital needed to fulfill large orders, pay suppliers, and support ongoing growth. This balanced approach helps companies navigate periods of high demand, manage risk, and maintain a stable financial position in a competitive marketplace.

Case Study

The Manufacturing Breakthrough

Canadian Mfr. faced a common dilemma: a $150,000 purchase order from a major retailer that exceeded their working capital by 200%. Traditional bank approval would take 6-8 weeks, risking contract cancellation.

Within a few weeks of applying for PO financing, company received $120,000 to fulfill the order. The financing cost of $4,800 was offset by a 3% early payment discount from suppliers, resulting in net savings of $300.

The successful delivery led to three additional orders totaling $400,000 over six months. Metro's revenue increased 65% year-over-year, establishing them as a preferred supplier while maintaining 100% business ownership.

Conclusion

FAQ

PO financing approval typically occurs within 24-48 hours once documentation is complete, with funds available within 3-5 business days. Speed depends on order verification and supplier coordination.

PO financing arrangements usually cover 80-90% of the order value, with the remaining balance paid upon delivery confirmation. Coverage percentages vary based on customer creditworthiness and order specifics.

PO financing approval focuses primarily on your customer's creditworthiness rather than your personal credit score. Strong customer payment history and order verification matter more than your credit profile.

PO financing excels in manufacturing, wholesale distribution, import/export, technology reselling, and contract services where orders are large, margins are healthy, and delivery timelines are predictable.

PO financing provides upfront capital before goods are delivered, while factoring requires completed invoices. Unlike traditional loans, PO financing doesn't require collateral or lengthy approval processes.

Citations

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR: Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

PO Financing Solutions for Canadian Business Growth | 7 Park Avenue Financial