What is PO financing and how does it work?

PO financing provides working capital to fulfill purchase orders by advancing funds based on confirmed orders from creditworthy customers. The lender pays suppliers directly and is repaid when the customer pays for delivered goods.

Who qualifies for purchase order financing in Canada?

Canadian businesses with confirmed purchase orders from creditworthy customers, established supplier relationships, and profit margins typically above 20% qualify for PO financing.

PO Financing: Fund Large Orders & Grow Your Business Fast

Q: What are the typical costs associated with PO financing?

PO financing costs range from 2-3% of the order value, depending on order size, customer creditworthiness, and transaction complexity. Visit https://www.7parkavenuefinancial.com

Problem: Large purchase orders can cripple cash flow for growing businesses.

Missing these opportunities means losing customers to competitors who can fulfill orders immediately.

Solution: Let the 7 Park Avenue Financial team show you how PO financing provides the working capital needed to accept and complete large orders, turning growth challenges into profit opportunities.

What is Purchase Order Financing?

Your firm has the ability to receive customer orders or contracts, but you are challenged with restrictions or unavailability of inventory and PO (purchase order) financing. Fulfilling those orders is crucial to maintaining customer relationships and your business reputation.

Growing your business and financing a business based on assets such as inventory and incoming orders has never been more of a challenge in Canada, making it essential to manage your finances effectively to secure PO financing.

Benefits of PO Finance

The key benefit of purchase order contract finance is your ability to fulfill orders that might not have been made given finance limitations.

That allows a business to grow and generate additional profits. The ability to fill your client order with no serious cash flow implications to your day-to-day operations is key.

When we speak to clients, we advise there is no one method that seems to handle all inventory and PO finance challenges.

But the good news is that via a variety of effective business financing tools you can employ, you are in a position to generate working capital and cash flow from these two asset categories.

PO financing can also help a business accept and fulfill a large order that might otherwise be out of reach due to limited funds, enabling the seller to take on bigger opportunities.

Let’s examine some real-world strategies that have made sense for clients. The attractiveness of this type of business finance is that it can be accessed quickly, typically in days, not months!

This quick access to funds significantly improves liquidity for businesses facing cash flow gaps, allowing them to meet operational needs and support growth. The root of the problem is simple: you have orders and contracts, but those will potentially be lost to a competitor.

Conventional wisdom is that you go to your bank and ask for financing to support inventory and purchase orders.

As you may have experienced, we aren’t big believers in conventional wisdom on that matter!

However, utilizing a conventional purchase order funding source does allow you to purchase a product and get your suppliers paid, thus facilitating your ability to deliver to your customers.

In this process, a PO financing company acts as a specialized financier, managing payments to suppliers and ensuring the transaction between the buyer and seller is completed smoothly.

In some cases, more established firms may wish to consider EDC financing via the Government Crown Corporation, typically for international sales.

One of the main benefits that many clients don’t realize in purchase order finance is that inventory financing and purchase order contract financing doesn’t necessarily require your firm to have a long or strong credit history.

The focus on structuring the transaction is around the inventory being financed and the general

creditworthiness of your client, who will be paying yourself or the inventory or PO financing firm. The value of the purchase order is a key factor in determining the amount of financing available, as funding is secured against the worth of these receivables.

Finally, PO financing focuses on the creditworthiness of your client, not your own, which means the seller can leverage the buyer's credit to secure funding and fulfill orders that drive business growth.

How Does Purchase Order Financing Work?

The overall process is fairly simple and easy to understand when it comes to putting the transaction together successfully.

On receipt of your confirmed purchase order, your supplier is paid via cash or a letter of credit—this payment is typically handled directly by the purchase order financing company, which pays the supplier to cover the supplier's costs.

Your firm, of course, completes the final shipment of the product, which typically involves some additional time on your firm’s part. Once delivery is made and the customer receives the goods, your business is invoiced and an accounts receivable is created.

To qualify, your firm must be able to prove you have a creditworthy supplier and customer.

The financing is secured by the value of the purchase order, providing assurance to the lender. This type of financing is often structured as a short term loan or cash advance, rather than a traditional loan, and is designed to provide quick access to money for operational needs.

Because purchase order finance is a more expensive form of financing, you should ensure you have healthy gross margins in order to absorb the financing cost; that should typically be at least in the 15–20% range. The transaction should always be a B2B (business to business) sale.

It is safe to say that goods must be tangible in nature. On shipment and, of course, payment from your customer, the transaction is in effect settled.

When the customer pays the invoice, the purchase order financing company collects the payment, ensuring your business does not have to manage accounts or chase payments directly.

In a true pure PO financing scenario, the PO funder is paid immediately on your invoicing of the product.

That is facilitated by your firm selling the receivable via a factoring-type transaction as soon as you have generated the invoice. This exchange of accounts receivable for immediate cash helps improve liquidity and provides working capital to your business.

This type of financing works best when it can assist a smaller firm to increase revenues when normal cash flows can’t finance these sales.

Smaller businesses obtaining large or bigger orders get immediate access to working capital.

Many fast-growing businesses come to a point where sales outpace incoming revenues, leaving them without enough cash flow on hand to cover operating expenses or new orders. PO financing works by enabling companies to take on bigger orders and close deals they might otherwise have to turn down due to lack of money.

PO financing and invoice factoring help small businesses stabilize their cash flows and gain access to working capital.

There are always limitations to this type of financing, so things we look for early in the transaction are the ultimate remarketability of your product in case there is a transaction risk.

Naturally, as we stated, the overall creditworthiness of your customer is key; his receipt of goods and payment in effect closes the transaction.

Inventory financing and PO financing are generally more expensive than traditional financing, due mainly to the significant transaction risk that the lender takes.

The fees charged by the purchase order financing company typically range from 1.5% to 3% of the financed amount, calculated based on the payment timeline and the percentage charged per period.

If the financing does not cover the full supplier's costs, your business is responsible for paying the remaining balance.

Therefore, we strongly recommend that your firm has solid gross margins in the 25% range to cover the associated costs of a PO financing, inventory financing transaction that also factors in the time it takes to get paid by your client, as that typically adds 30–60 days on to the whole cycle of the transaction.

There are also risks and limitations, so it is important to understand the terms of the deal, including all fees and the role of the purchase order financing company in managing accounts and payments.

What Comes First? Invoice or Purchase Order

There is a key difference between purchase order financing and invoice factoring/invoice discounting, but both have the same goal in sight: ensure you can cash flow your business revenues.

Financing the receivable happens after you have sold your goods; the PO process is, of course, prior to the sale.

One of the best ways to ensure the maximum financing of your sales, POs, and contracts is to consider an asset-based line of credit for cash flow needs.

Coupled with a facility that will finance your purchase orders, this is the ultimate working capital tool that will allow you to grow business quickly and significantly.

This type of facility is generally a nonbank facility and is offered by independent finance firms. Unlike traditional loans from banks, which often require extensive credit checks, regular payments, and lengthy approval processes, these alternative financing options provide much faster access to funds with fewer requirements.

Entrepreneurs can leverage PO financing and other alternative funding solutions to efficiently manage large purchase orders, scale their businesses, and maintain strong relationships with clients and suppliers, especially when operating in international markets.

Alternatives to Purchase Order Financing

While purchase order financing can be a powerful solution for businesses looking to fund large orders and maintain healthy cash flow, it’s not the only option available.

Depending on your business’s unique needs, there are several alternative forms of order financing and working capital solutions to consider.

One common alternative is a business line of credit. This flexible financing option allows businesses to access cash as needed, making it easier to cover supplier costs, manage day-to-day expenses, or take on larger orders without waiting for customer payments.

Unlike purchase order financing, a line of credit can be used for a variety of business purposes, not just to fund purchase orders.

Invoice financing, also known as invoice factoring or invoice discounting, is another popular choice.

With invoice financing, businesses can unlock cash tied up in outstanding invoices, improving cash flow and providing immediate funds to fulfill new orders. This can be especially helpful for companies that have already delivered goods or services and are waiting for customers to pay.

While approval can be more challenging and the process slower compared to purchase order financing, bank loans often offer lower interest rates and longer repayment terms.

This can be ideal for businesses with strong credit histories and predictable revenue streams.

Supplier credit is another alternative, where suppliers extend payment terms to their buyers. This arrangement allows businesses to receive inventory or materials upfront and pay the supplier at a later date, helping to bridge cash flow gaps without the need for external financing.

The best choice depends on your business’s cash flow needs, the size and frequency of your orders, and your overall financial health. By exploring all available order financing options, businesses can find the right fit to support growth, manage large orders, and keep operations running smoothly.

Case Study

Challenge: ABC Manufacturing received a $250,000 order from a major retailer but lacked the working capital to purchase raw materials and fund production.

Solution: 7 Park Avenue Financial arranged PO financing covering 80% of the order value, providing $200,000 in working capital within five days.

Results: ABC Manufacturing fulfilled the order on time, earned $50,000 in profit, and established a ongoing relationship with the retailer worth $1.2 million annually. The financing cost of $12,000 (6% of funded amount) was easily covered by the order's profitability.

FAQ

What industries benefit most from PO financing? PO financing works best for manufacturing, wholesale distribution, import/export businesses, and companies with established supplier relationships where order fulfillment requires significant upfront capital.

How quickly can PO financing be approved? PO financing approval typically takes 3-7 business days, with funds available within 48 hours of approval, making it ideal for time-sensitive orders.

What are the typical costs associated with PO financing? PO financing costs range from 2-3 % of the order value, depending on order size, customer creditworthiness, and transaction complexity.

Do I need collateral for PO financing? PO financing is typically secured by the purchase order itself and the resulting inventory, eliminating the need for additional collateral or personal guarantees.

What credit requirements apply to PO financing? PO financing focuses more on your customer's creditworthiness than your business credit, making it accessible for companies with limited credit history.

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

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