Purchase order (PO) financing is an excellent funding solution for businesses and organizations that lack the funds to buy the inventory needed to fulfill orders. In this type of financing, the PO financing NBFC will pay your supplier to manufacture as well as deliver the goods to the customer. The customer then pays the purchase order financing NBFC directly, who then deducts their fees before sending you your profits.
For businesses in their infancy that receive multiple orders at once but don’t yet have the cash flow to purchase the necessary inventory, PO financing can be a simple solution to ensure you don’t have to turn the customer away.
In this article, we explore how PO Financing works, its benefits, etc.
HOW PURCHASE ORDER FINANCING WORKS
The process of PO financing is much simpler than it might sound:
Step 1: You Receive a Purchase Order
Your customer submits an order that specifies the type and volume of goods they would like to purchase. Based on their order, you should be able to determine whether you will need to access financing. If you do, this initiates the process of PO financing.
Step 2: Your Supplier Estimates Your Costs
You then consult your supplier for the cost for the amount and type of goods requested by the customer. The supplier sends you an invoice for the costs, which will help you confirm that you cannot afford to fulfill this order because you don’t have enough cash on hand.
Step 3: You Apply for Purchase Order Financing
After proper confirmation, you can apply for PO financing. The lender will approve you realistically for 80-90% of your supplier costs, depending on various factors.
Step 4: Your Supplier Is Paid
The PO financing NBFC pays your supplier based on your application. The supplier can now do the work necessary to fulfill your customer’s purchase order.
Step 5: Your Deliver the Goods to Your Customer
You then deliver the goods to your customer. Arrangements can be made for the supplier to directly ship the goods to the customer. Be sure to note that you will not be the middleman here as you might typically be if you weren’t using purchase order financing.
Step 6: You Invoice Your Customer
Once the supplier delivers the goods to the customer, it is time for you to invoice the customer for their fulfilled order. This payment will be done towards the Purchase Order Financing NBFC.
.Step 7: Your Customer Pays the Purchase Order Financing NBFC
When your customer pays their invoice, they will be paying the purchase order financing NBFC directly—not you in a designated escrow or collection account. Also, remember that the faster your customer pays the lender back, the faster you will get your cut of the profits.
Step 8: The Purchase Order Financing NBFC Forwards Your Money
Once the purchase order finance NBFC receives payment from your customer, they deduct their fees and forward you the remaining sum of the proceeds from the purchase order. Essentially, the purchase order financing fees will act as the interest on your financing.
BENEFITS OF PO FINANCING
If you are struggling to acquire the inventory you need to fulfill an order or are facing a cash flow problem, purchase order financing might be just the solution. Here are some pros to consider:
- Easy to qualify
Purchase order financing is a good choice for business owners who are having a hard time being approved for a loan and within a reasonable time. Purchase order loans are usually easier to qualify for. The purchase order can function as collateral to back your loan.
- No personal guarantee
When you take on a regular business loan, usually you need to sign a personal guarantee. This means that if the business cannot pay back the loan, the lender can seize your personal assets to get their money back. Some PO financing is non-recourse. This means if your customer is unable to pay for the goods, the lender absorbs the risk. This differs from lender to lender.
- Great for startups
Startup owners often find themselves in a catch. They have a hard time getting funding because they do not have a record of accomplishment, but they are in rapid growth mode. If a startup turns down even one customer’s order, it can seriously hamper the NBFC’s growth prospects. Purchase order financing helps you keep all your customers satisfied while shoring up your cash flow.
Purchase order financing technically is not a loan, even though you are borrowing money. When your cash flow dips, you can trade in outstanding purchase orders for funding. Moreover, you can finance up to 100% of your costs in one lump sum without having to worry about paying back the money in installments.
PO financing is much more transaction-focused and flexible than, say, a bank loan or SBA loan that you make a long-term commitment to paying back over several years in small installments.
Purchase order financing is a great way for funding cash-strapped growing businesses, and seasonal businesses. We hope this guide helped you to better understand the ins and outs of this type of funding so you can decide if it is the right solution for your business.