what is purchase order finance

#TheMoneyFactor What Is Purchase Order Finance?

Hi and welcome to #TheMoneyFactor my name is Ian Varley CEO of Eagle Business Credit. On today’s episode we’re going to be talking about purchase order finance, specifically what purchase order finance is, who can qualify for it, and what the benefits are. I have with me today Angela Reece my head of operations. Purchase order finance is always a great topic. I think it’s confusing for some people, so I’m glad we’re going to spend a few minutes going through all of that.

We can start with discussing what exactly purchase order finance is. So, purchase order finance is a mechanism that will provide you with the working capital that you might need in order to bring in finished goods and have it delivered to your customer. When I say finished goods, I mean a completely finished product. So, you’re buying the product somewhere from overseas or somewhere in the United States, and they’re putting putting together that product or making that product and shipping it directly to you. Maybe in some cases, they are sending it directly to your customer. That is considered a finished product. PO Funding comes into play whenever you have an actual order for those goods. You would submit those orders to your supplier and get quotes, pricing, and shipping details. In order to pay for those goods, you could use purchase order funding.

Purchase Order Financing Only Works with Finished Goods

The key point is that PO funding only works to finance finished goods. We have a lot of people that call us up and say, “Hey I have an order from my customer for maintenance.” In that scenario, purchase order finance is not going to be a fit. Invoice factoring, another financing solution, would be a better fit. You must be buying finished goods from a manufacturer, and that’s when we can come in and provide you with the working capital to help you get those goods. We see a lot of people call us that are in need for additional financing over and above a bank facility or a factoring facility. PO Finance can be an extra injection of cash, but there are qualifications related to the finished product.

What Are the Qualifications for Purchase Order Funding?

You want to make sure that your profit margins in your deal are going to be adequate to cover your PO financing. Depending on what order you want to finance through PO Finance, we may only provide up to maybe 70% funding against that purchase order. Otherwise, there could be a deposit that is required in order for that funding to work. Your profit margin will not be a deal breaker, but it could create more challenges in the PO Funding process.

How Does PO Finance Work?

The real key is that we are not providing money to the clients, we’re actually funding the suppliers. So, we’re going to pay the supplier directly in order to get those goods shipped for you. It is a very transactional and therefore sometimes a confusing type of finance.

Po Finance can help if you:

  • Are importing goods or getting them from a domestic manufacturer
  • Need that manufacturer to be paid for those goods
  • Do not have terms with them (or if you do have terms they’re very tight and you don’t have enough working capital in order to get the order filled)

Who Benefits from Purchase Order Finance?

Let’s talk about the type of companies that benefit from PO Finance. We have done a lot of PO Finance deals over the years. The first type of company that would benefit is fast growing. Next, a startup company will benefit from PO Finance. If they have this wonderful idea of a product that they want to manufacture and ship out to their customers, we can do that. You want to consider whether there is a need for that product. What are the terms of the customer? Are there seller return type terms in the purchase order (meaning if they don’t sell it, can they return the product?) and how does that impact you? Are the goods branded? If they have the company’s logo on them and something goes wrong in the transaction, then you may not be able to get the PO Funding you need for that.

Small Business Purchase Order Financing

Overall, PO Funding is good for small businesses who have product that is a finished product and shipping it to the customers (wherever they may be). It could be a manufacturer putting together a lot of different components into one final product, or it could be just one product all together that a manufacturer has compiled for you. The key is that Purchase Order Finance works for small businesses that are growing rapidly.

purchase order finance cycle

Purchase Order Finance and Cash Flow

These businesses typically that are looking for PO Finance are growing rapidly, and their cash flow is not keeping pace with the orders. So, they have a great product getting manufactured, but they cannot keep pace with sales. The need for funding is to support the growth in their sales volume. PO Finance is the additional injection of cash whether you are a startup business, growing fast, or maybe your balance sheet isn’t strong enough for a bank loan.

Using Purchase Order Funding to Grow

The underwriting for a PO Finance facility is going to look into the details of the product. Where is it being made? How is it shipping? What is the profit margin of that transaction? The purchase order is what we are financing for you. We help you get the money together to pay the supplier for the goods so that you can meet that purchase order and continue on that strong growth pattern. If it is a product that is continuous and you’re making those goods every single month, this can be a mechanism to help bridge that gap and keep that cash flow smooth. You can avoid having any delays in shipments to your customers because you have the funds available to make sure that those shipments continue.

Which Purchase Orders Can You Finance?

Since it is transactional, you don’t have to finance each and every purchase order through us. You will, however, need to be a factoring client. Our repayment for purchase order advances is through receivables funding. This means that PO Finance is a top-up facility (an additional facility) over and above the receivables line of credit that you can obtain from Eagle. Since it is transactional, you do not have to finance each PO. You can pick and choose the larger ones, the ones that makes sense for you, or certain manufacturers where you don’t have credit terms.

What Terms Do You Want with Your Supplier to Use PO Finance?

In order to qualify for PO Finance, you want to have an order from a well-known customer or someone who’s going to pay you. You want to make sure that you have established good payment terms with your customer. Generally, you want to look at 30-day terms. That’s the best out there. You don’t want to try to extend those terms, or else it could be a very expensive funding for you. In the end, when you look for your suppliers, you want to make sure you negotiate good terms.

Negotiating Terms with Your Supplier

Be aware that some suppliers will require funds upfront in order to start production of those goods. While that is common, you can negotiate different things where you pay for the goods after inspection before they ship out and make the payment upon presentation of all of the inspection documents and the bill of lading. That just protects you to make sure that what you’re paying for is what you’re getting. Then, when you do get the goods, you haven’t already paid for something that you can no longer sell to your customer.

Is Purchase Order Financing Right for Your Small Business?

If you’re not sure whether your business will benefit from PO Finance, we invite you to contact us. We will happily talk through your scenario if you’re interested in purchase order finance. We can see if you are a good fit. Ultimately, we only offer PO Finance if it is beneficial to your business. There is no obligation to finance your purchase orders, but ultimately if you are selling to commercial customers, you have a physical product, you’re growing, and you need cash flow support, then PO Finance and receivables finance will be a good fit for you.

You don’t need impressive personal credit. You don’t need a strong balance sheet. Instead, you need to be in business with customers and orders and sales. If PO Finance doesn’t fit, then we will be very upfront and maybe recommend some alternatives for you.

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