Purchase Order Financing: Instant Capital Solutions

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

From Orders to Profits: The Game-Changing Power of Purchase Order Financing

If they can't fund these two asset categories, their firm will risk serious working capital and cash flow deficiencies.

Trapped Between Opportunity and Cash Flow Reality

Profitable purchase orders sit on your desk, but your bank account can't cover production costs.

Traditional lenders reject your application because you lack sufficient collateral. Meanwhile, competitors with deeper pockets capture market share you should own.

Let the 7 Park Avenue Financial team show you how Purchase order financing breaks this cycle, turning your confirmed orders into immediate capital, ensuring you never miss another growth opportunity again.

INTRODUCTION

Purchase Order Financing is a game changer for businesses struggling with cash flow management. It allows companies to access the necessary funds to fulfill orders without relying on their own resources.

This financing option is particularly beneficial for small businesses with limited access to traditional financing due to size or credit history. This article will explore the benefits, workings, and relevance of Purchase Order Financing for small businesses in today's competitive marketplace.

To paraphrase one of the most famous lines ever written—"it's the best of times and the worst of times"—that is the case when sales and profit potential are great, but owners are challenged by key issues such as:

We will focus on that third area—improving operational efficiencies via proper financing of your current assets and sales. By the way, believe it or not, that's the cheapest way to finance your firm, given the higher cost of long-term debt and the even higher cost of bringing in outside equity.

You can increase bottom-line profits and optimize cash flow by leveraging your current assets—typically A/R and inventory.

WHY IS PO FINANCING A BUSINESS GAME-CHANGER?

Purchase Order Financing is a game-changing funding option that helps small businesses manage cash flow by providing access to the necessary funds for fulfilling orders.

This financing method enables businesses to accept larger orders, expand operations, and overcome cash flow constraints.

In particular, it benefits small businesses with limited access to traditional financing options. This article will explore the benefits, workings, and role of Purchase Order Financing in helping small businesses thrive in a competitive marketplace while ensuring suppliers' costs on orders can be funded.

HOW DOES PURCHASE ORDER FINANCING WORK?

Purchase Order Financing is a funding solution designed to assist businesses in fulfilling customer orders by providing the necessary cash.

The process operates as follows: when a business receives a purchase order, it is submitted to a Purchase Order Financing company.

Subsequently, the company disburses funds to the business for purchasing the required raw materials or inventory. Upon completing the order and receiving payment from the customer, the business repays the Purchase Order Financing company, including any applicable fees or interest.

AN EXAMPLE OF A PURCHASE ORDER FINANCE SOLUTION

If you choose a purchase order financing facility, you can take on larger contracts and generate more profits for your firm.

Overall, larger orders and contracts also increase your competitiveness in your industry—with your competitors typically wondering how you do it!

By utilizing a P.O. financing strategy, you allow the P.O. finance firm to pay suppliers for goods and services you need to facilitate the order.

When your product is shipped and delivered, the purchase order finance firm is paid via your bank or A/R financing facility.

Although to many the perception is of a higher cost of financing, let's look at what has happened—you have converted inventory into A/R into cash.

Payment by your customer generates profit. Without the funding for the purchase order, you often could not have fulfilled such large orders or contracts. So by sacrificing some gross margin, you have grown revenues and bottom-line profits.

Firms that have a significant investment in inventory can achieve similar financial success. With an inventory financing facility, you can stock more products and generate those additional sales.

For firms who cannot achieve the traditional bank financing sought by most, a combination of inventory and receivable financing facilities is available via an asset-based line of credit. Here it's all about the "cash conversion cycle"—turning A/R and inventory into cash and profits.

The higher interest rates charged by asset-based lenders can easily be significantly offset by smarter volume purchasing and negotiations with key suppliers on pricing. Bottom line—you now have the cash to pay for products and services.

The cost of not taking discounts or being unable to make volume purchases for cash is significantly greater than the financing costs you have for alternative financing facilities such as inventory financing, purchase order financing, and receivable financing.

KEY POINT:

Even if purchase order, inventory, and receivable financing were equal in cost to carrying receivables and inventory on your books, it would still be a viable solution because you would have fewer sales and less competitiveness in the marketplace.

For example—if your firm could buy $500,000.00 of inventory on 2% net ten-day terms and you could not take the discount, the opportunity cost of not taking that discount is over 36%.

Our simple statement to clients is as follows: "The cost of paying in full is usually much higher than the cost of borrowing!"

BENEFITS OF PURCHASE ORDER FUNDING SOLUTIONS

It enables them to accept larger orders and grow operations without worrying about cash flow limitations, benefiting small businesses with limited access to traditional financing.

Additionally, it helps improve supplier relationships by ensuring timely and full payments. Another advantage is the quick and easy accessibility of Purchase Order Financing compared to traditional loans, making it ideal for seizing new opportunities or fulfilling urgent orders.

COMPARING P.O. FINANCING VERSUS TRADITIONAL BUSINESS LOANS

It is based on the purchase order rather than the business's creditworthiness, making it accessible to companies with limited credit history or poor credit scores who can't qualify for other small business loans from a traditional financial institution.

Furthermore, Purchase Order Financing is typically faster and easier to obtain, as the focus is on the creditworthiness of the customer placing the order rather than the business itself. Invoice factoring/invoice finance and a merchant cash advance are alternatives to P.O. funding.

Still, they do not solve the challenge of cash flow to purchase inventory/products and facilitate business growth.

Case Study

The Challenge: A Canadian manufacturer received a $250,000 order from a major retailer but lacked sufficient working capital to purchase components and meet the 60-day delivery deadline.

The Solution: Through purchase order financing, the company secured $200,000 within one week. The lender paid suppliers directly, ensuring timely production without depleting the company's existing cash reserves.

The Results: The firm fulfilled the order on time, earned $75,000 in profit, strengthened their relationship with the retailer, and secured three additional orders worth $500,000. The success established the business as a reliable supplier and opened doors to larger opportunities they previously couldn't access.

KEY TAKEAWAYS

CONCLUSION - THE FINANCIAL BOOST OF PURCHASE ORDER FINANCING

Purchase Order Financing is a game-changing solution for small businesses seeking growth opportunities.

It enables companies to access the necessary cash to fulfill larger orders, overcome cash flow constraints, and strengthen supplier relationships.

While there are associated fees and interest, they are typically lower compared to traditional business loans. For small business owners aiming to expand operations, considering Purchase Order Financing can be highly beneficial. Understanding its intricacies provides a competitive edge and sets the stage for success in business finance.

Focused on more efficient financing around asset turnover and proper focus on the opportunity cost of working capital?

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

What is purchase order financing, and how does it work?

Purchase order financing gives businesses the capital to pay suppliers upfront to fulfill large orders. The process involves three key parties: the borrower (business), the lender (purchase order financing company), and the supplier. The lender evaluates the purchase order and the creditworthiness of the buyer and supplier, approves a percentage of the supplier costs, pays the supplier directly, and ensures the order is fulfilled. The financing company deducts fees and financing costs and remits the final payment to the company.

What are the advantages of using purchase order financing?

The advantages of using a P.O. financing company for purchase order financing include the ability to fulfill large buyer orders, support for established and growing firms, and assistance in the supply chain process. Using solutions from P.O. financing companies to accept orders they may have rejected due to cash flow constraints helps maintain customer and supplier relationships. It benefits industries with high-margin transactions such as manufacturing, retail, and import-export.

Are there any drawbacks or limitations to purchase order financing?

Limitations of purchase order financing include its suitability primarily for industries dealing with physical goods and high-margin transactions. It may not be ideal for service-based businesses or those dealing with small buyers and purchase orders. Additionally, the cost-effectiveness of purchase order financing depends on the specific circumstances and profitability of the transactions involved and the length of time before the customer pays.

How can purchase order financing contribute to a business's growth potential?

Purchase order financing can contribute to a business's growth potential in several ways. It enables the business owner to fulfill large orders, expand their customer base, and increase sales. By releasing working capital, businesses can invest in expansion efforts such as acquiring new assets or entering new markets. Accepting orders that would have been declined due to cash flow constraints helps build customer loyalty and strengthens relationships with buyers and suppliers, fostering long-term growth.

What are the benefits of P.O. finance?

The benefits of a purchase order financing agreement for small businesses include access to funding that enables them to take on larger orders and grow their operations without cash flow constraints. It also helps improve supplier relationships by ensuring timely and full payments, especially for small businesses with limited purchasing power compared to larger companies. Additionally, purchase order financing is relatively fast and easier to obtain than traditional business loans, allowing small businesses to seize opportunities or fulfill urgent orders.

What are the qualifications for Purchase Order Financing Companies?

To qualify for purchase order financing, businesses typically need to meet specific requirements, including having a customer's purchase order for a tangible product, having a sufficient profit margin on orders to cover financing costs, and having a track record of fulfilling orders on time and in full. These qualifications help ensure the viability and reliability of the business when dealing with purchase order financing companies.

Purchase order financing works best for businesses with confirmed orders from creditworthy customers, typically in manufacturing, distribution, wholesale, and service industries where there's a clear fulfillment process and delivery timeline.

Purchase order financing approval typically takes 3-7 business days once documentation is complete, with funds available immediately upon order verification and customer credit approval.

Purchase order financing costs range from 2-6% per month depending on order size, customer creditworthiness, and fulfillment timeline, making it more expensive than traditional loans but faster and more accessible.

Purchase order financing focuses primarily on your customer's creditworthiness rather than your business credit score, making it accessible even if your business has credit challenges or limited operating history.

What documentation is required for purchase order financing approval? Purchase order financing requires the confirmed purchase order, customer information, supplier quotes, proof of ability to fulfill the order, and basic business financial information for evaluation

Purchase order financing is provided by specialized alternative lenders, factoring companies, and some traditional banks, with each offering different terms, approval criteria, and industry focus areas.

Purchase order financing works best for manufacturing, importing, wholesale distribution, and contract services where there's clear order fulfillment processes and creditworthy end customers.

Purchase order financing makes sense when you have confirmed orders exceeding your available working capital, need to scale quickly, or face seasonal cash flow challenges affecting growth opportunities.

Purchase order financing is available through online alternative lenders, traditional factoring companies, specialized trade finance providers, and some credit unions across Canada.

Purchase order financing offers faster approval, doesn't require perfect credit, uses orders as collateral, and provides capital specifically tied to revenue-generating activities rather than general business purposes.

Purchase order financing provides upfront capital before production begins, while invoice factoring advances money against completed invoices, making PO financing more suitable for businesses needing production capital.

Purchase order financing agreements typically include recourse provisions, meaning if the customer defaults, your business may be responsible for repaying the advance, making customer credit evaluation crucial.

Purchase order financing typically covers 70-90% of the order value, with the exact percentage depending on customer creditworthiness, your business profile, and the specific lender's policies.

Purchase order financing approval requires verified purchase orders, creditworthy customers, demonstrated ability to fulfill orders, basic business documentation, and sometimes personal guarantees from business owners.

Purchase order financing typically takes 3-10 business days from application to funding, depending on order complexity, customer verification requirements, and completeness of submitted documentation.

Purchase order financing accelerates growth by removing working capital constraints, allowing businesses to accept larger orders, take on more customers, and scale operations without waiting for internal cash flow generation.

Purchase order financing creates competitive advantages through faster order acceptance, ability to offer better payment terms to suppliers, capacity to handle larger projects, and reduced dependence on personal guarantees.

Purchase order financing improves cash flow by providing immediate capital for order fulfillment, reducing the cash conversion cycle, and creating predictable funding tied directly to sales activity.

Purchase order financing offers flexibility through order-by-order approval, no long-term commitments, scalable funding amounts, and the ability to finance multiple orders simultaneously as business grows.

Purchase order financing reduces stress by eliminating the need to choose between profitable orders and cash flow stability, providing certainty in fulfillment capabilities, and reducing personal financial exposure.

Purchase order financing can be combined with equipment financing, lines of credit, and other funding sources, though coordination between lenders may be required to avoid conflicts in collateral or cash flow.

What happens to existing purchase order financing if my business gets acquired?

Purchase order financing arrangements typically require notification of ownership changes, with some agreements transferring to new owners while others may be called due upon business sale or acquisition.

How does seasonal business fluctuation affect purchase order financing availability?

Purchase order financing adapts well to seasonal businesses since funding is tied to actual orders rather than ongoing credit lines, making it particularly valuable during peak seasons when working capital needs spike.

What international considerations apply to purchase order financing for Canadian exporters?

Purchase order financing for international orders involves additional considerations including currency risk, international credit verification, shipping insurance, and compliance with export regulations and documentation requirements.

Purchase order financing works by having a lender pay your suppliers directly after verifying your confirmed purchase order and customer creditworthiness, with repayment coming from the customer's payment when the order is fulfilled. Borrowers pay interest to the PO financing company on only the funding that is drawn down. PO financing covers only a percentage, not the majority of the funds needed to pay the supplier. Buyers should be prepared to commit at least 10%.

Why do lenders focus on customer credit rather than business credit for purchase order financing?

Purchase order financing lenders focus on customer credit because the customer's payment ultimately repays the advance, making their ability and willingness to pay more important than the borrowing business's credit history.

How does purchase order financing create a sustainable growth cycle? Purchase order financing creates sustainable growth by enabling businesses to fulfill larger orders, generate higher revenues, reinvest profits into more inventory and capacity, and qualify for larger financing amounts on future orders.

Citations / More Information

' 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

Purchase Order Financing Solutions for Canadian Businesses | 7 Park Avenue Financial

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