When you need liquid funds to meet the needs of a large customer purchase, purchase order financing can be an incredibly valuable tool. With purchase order financing, a lender will pay your suppliers to complete an order, and the supplier will then in turn pay you for the transaction minus a factoring fee and other costs. In short, this type of financing can ensure that your customers get the merchandise they are purchasing and that you get the profits from that purchase.

While purchase order financing can be a valuable method of making sure your transactions go smoothly, obtaining this type of financing does come with requirements. So if you’ve decided that purchase order financing is right for you, it’s important to go over a checklist of requirements before applying. 

Purchase Order Financing Requirments

Before you apply for purchase order financing ensure you meet the below requirements are able to provide the documentation associated with them.

Requirement #1 – You Must be a B2B or BTG Entity

In order to qualify for purchase order financing, you must be a business-to-business or a business-to-government agency. This simply means that you must be doing business with either another business, such as a supplier, or with a local, state or government agency through a government or municipal contract. 

Requirement #2 – You Must Sell a Tangible Product

The first requirement is that you must sell a product that can be touched and seen. This sounds obvious, of course, but what this really means is that purchase order financing cannot be applied to the sales of services, such as accounting services or medical treatments, it can only be applied to physical goods. 

Requirement #3 – You Must Meet a Minimum Purchase Order Amount

Lenders offering purchase order financing charge a factoring fee based on the amount of the transaction, so they all require a minimum purchase order amount to make the transaction worth their while. The minimum amount of the transaction varies from provider to provider, with some financing companies requiring a minimum of $50,000 while others requiring a minimum amount of up to $200,000. Therefore, you should make sure the amount you need to fulfill your order is at least $50,000 just to be able to find a purchase order financing provider. 

Requirement #4 – Your Suppliers & Customers Must Meet Minimum Credit Scores

In a purchase order financing agreement, financing companies are paying your suppliers directly then depending on them to deliver the goods or products. From there, your customers actually pay the purchase order financing company. Therefore, they will be checking the creditworthiness and reputation of your suppliers and customers before approving the transaction. The best way to meet this requirement on your end is to make sure you are doing business with reputable suppliers and accepting purchase orders from customers with good credit ratings. 

This should be simple enough if the transaction involves a single supplier and one customer, but if it involves multiple suppliers, you should check with them early. You can request a credit check from them or check their business credit through Dun & Bradstreet.

Requirement #5 – You Must Meet Minimum Profit Margin Requirements

In order to approve you for purchase order financing, the lender will want to know if you can afford the fees. The best way for them to do this is to set a minimum profit margin for the transaction. Typically, the minimum profit margin ranges between 10% to 20% depending on the lender. 

Requirement #6 – You Must Have a Minimum Time in Business

With most small business financing, you’ll need to have some time in business in order to qualify for purchase order financing. More specifically, however, is that you need to have engaged in the specified transaction with your suppliers before in order to qualify. 

Requirement #7 – Your Financial Statements

You will also need to provide your company’s financial statements such as bank statements and other balance sheet information. More importantly, however, you will also need to provide information on any contracts you have with your suppliers and clients/customers. 

Start Your Application Early

If you decide purchase order financing is right for you, you should start the application process early, as funding can take longer than with other types of financing such as a online working capital loans or revenue-based financing because more parties are involved in the transaction. 

It’s common knowledge that individuals and families should have at least six month’s worth of their expenses in a savings account to deal with emergencies.   But did you know that having an emergency fund is a good business practice as well?  The unexpected could come at any moment, and as the past four years have taught us the residual impacts of the unexpected can just keep coming and coming.   

How and where do you start building out an emergency fund without negatively impacting your business right now?  Let’s run through a few ways that you can use business financing to get you on the road to securing your business in the event of an emergency. 

What is a Business Emergency Fund?

To start, let’s cover the basics:  a business emergency fund is a savings account set aside to quickly cover unexpected expenses for your business. It is a fund that should be contributed to regularly and should not be accessed for anything other than a real emergency that could risk closing your business’s doors. To put it simply, this fund is your first line of defense when something risks interrupting your daily operations.

How Much Money Should an Emergency Fund Have?

The amount of money needed in an emergency fund will depend wholly on your business and its annual operating expenses along with other factors such as your inventory, receivables, and whether or not your business runs seasonally. All these factors, as well as your personal preferences as the business owner, will determine how much money you will need to handle what your business would consider an emergency. A good rule of thumb, though, is that your emergency fund should cover – at minimum three months worth of your business expenses.

Using a Business Loan to Boost Your Emergency Fund

If you are looking to quickly build or add to an emergency fund without impacting your existing cash flow and putting other business goals on the back burner, creatively using funds from a business loan could make that possible. Here are a few strategic ways you can use business loans (or other types of business financing) to build an emergency fund without sacrificing other areas of your business – some can lead to a quick build of an emergency fund and some require a long-game mentality.  

Cover an Expansion or Improvement That Will Lower Overall Expenses

Using a business loan to expedite expansion or a business improvement is a classic way to boost your overall capacity and, eventually, your revenue. If investing back into your business means that you’ll make more profit down the line, you could allocate a percentage of all new revenue to invest in your emergency fund at a level that may not have been possible before making the improvements.

Let’s say, for example, an auto repair business has a plan to increase its capacity and efficiency by adding a new hydraulic lift to its garage. Using a business loan (or equipment financing) to buy the lift more quickly could increase the business’s rate of repair and eventually free up more working capital as a result. As long as the business eventually puts a percentage of that working capital back into an emergency fund, financing could help get that fund off the ground faster.

Cover Payroll to Expand Staff

Business loans are also a solid means for a business owner to cover payroll. Instead of using the loan to cover payroll when cash flow is low, consider, instead, using that loan to hire more employees or temporary workers which, in turn, could increase your profits over time. If high-achieving or strategically placed employees have the potential to make you more money more quickly, it can be more than reasonable to use a loan to expedite those workforce additions. It’s then, of course, essential that the business owner uses that capital boost to reinforce their emergency fund.

Refinance or Consolidate Current Debt

If your existing debt is spread across several lenders or is steeped in high interest, refinancing that debt could change up your monthly payments and give you more working capital. Especially if your business has a serious amount of credit card debt, it’s more than possible that refinancing or consolidating your business debt could help reduce your overall monthly payments. By bringing your monthly payments down and your working capital up, it’s possible your business could have more capital on hand each month to boost your emergency fund.

Buy Up More Inventory

Managing inventory is the basis of good daily operations. If you can find a way to pay less per piece for your inventory stock you’re confident will be sold, it may make sense to use a business loan to take advantage of bulk discounts to the fullest. If your business can turn that inventory win into a cash flow win, you can then reinvest that cash flow back into your emergency fund.

Using an SBA Disaster Loan

SBA Disaster Loans aren’t going to help establish an emergency fund unless your business has already been hit by a disaster. So, if your business is hit with a disaster and your emergency fund is either now depleted or never existed in the first place, applying for an SBA Disaster Loan could be a great way to quickly build back up your emergency fund and help get your business back on its feet.

Eligibility for SBA Disaster Loans is based on how the federal government and FEMA determine disaster zones. Keep a close eye on the SBA website to find out when or how your business could be eligible for a disaster loan.

Putting Loan Funds Directly into Your Emergency Account

The easiest way to use a business loan to build out an emergency fund is to simply directly deposit those funds into your emergency account.   Of course, this would mean you already have the revenue coming in to cover the payments for that loan so this strategy should only be used when you want to and afford to quickly bolster that fund. 

Other Financing Options Relevant to Emergency Funds

Business loans aren’t the only way to keep your emergency fund in good form.  Here are a few additional financing options you could use to strategically build or add to your fund. 

Line of Credit

While a line of credit won’t necessarily help build an emergency fund, having a well-maintained line of credit could free up some of your working capital and allow you to invest back into the fund more fully. A great example of how a line of credit can help free up cash flow is invoice management. Imagine that a business deals with many invoices that can take several weeks or months to pay out. Using a line of credit to cover expenses and then eventually paying them back through those paid-out invoices is a great way to boost your working capital.

Business Credit Cards

A business credit card could be seen as another line of defense between an emergency and your cash reserves. While business credit cards generally have quite high monthly interest rates, using that card instead of dipping into your savings or operating expenses is a great way to ensure your cash flow (and your ability to invest back into your emergency fund) stays consistent.

Every Business Needs an Emergency Fund

No business is insulated from unexpected expenses. Building an emergency fund that can get your business through essential repairs or major changes can be the difference between whether or not your business exists tomorrow at all.  Especially if your business is behind on its emergency fund targets, using a business loan to quickly free up your working capital could be just what is needed to get you on the road to building the emergency fund you need.

Business expansion is one of the primary reasons that small businesses seek out financing. But if your business is taking on its first big expansion or you are relatively new to the modern world of financing, finding the best financing solution for your expansion may seem daunting. After all, both expansion and financing are not one-size-fits all, especially when considering that different type of business growth call for certain types of business financing.   How do you determine which type of business financing is best for your expansion plans?   

Types of Business Financing that Fund Expansion

Let’s go product by product and lay out some use cases where one type of financing may fit better than another.

The Versatile Nature of Business Loans

It is very common to pair a business loan with expansion because business loans are so versatile. Business loans allow an owner to take out a lump sum of capital after making an agreement to pay that sum back over time with predetermined interest. So, any kind of expansion that calls for a lump sum of money, (that would mean most) could likely be expedited with a business loan.

Any kind of expansion – from mergers to real estate has the potential to increase profits, especially with an owner who knows their industry well. Using a business loan to strategically expand your operation is so common, then, because it fits so many practical use cases. Further, business loans tend to have much longer repayment terms compared to other types of financing. This means that business loans may be the preferred choice for expansions that take longer to break even or require a significant amount of capital upfront.

Expansion Through Equipment

If your expansion is going to require new equipment, then equipment financing is an excellent option to consider.  Equipment financing, as the name implies, is a financing product specifically for acquiring equipment. This means that the total value of the loan should not exceed the price of that equipment, plus interest. Further, in many equipment financing cases, the equipment itself can be used as collateral for the loan. The terms of the loan, also, are often based on the life expectancy of the machinery itself.

Expediting your ability to acquire new equipment is a great way to increase your profits faster. For example, a trucking company could use equipment financing to expand its fleet. This trucking company could then increase its capacity to take on orders thereby meeting expectations for that return on investment. 

Leverage Outstanding Invoices to Fund Expansion

By leveraging invoice factoring, small businesses can access immediate cash flow by selling their outstanding invoices to a factoring company at a discounted rate. This infusion of funds can then go toward growth-related needs such as expanding operations, hiring staff, investing in marketing, or purchasing inventory. Unlike traditional financing options, invoice factoring often doesn’t require traditional collateral (the invoice, itself, can typically be used as the collateral) and it doesn’t have a lengthy approval process, making it an attractive option for small businesses looking to expand quickly.

By staying proactive in managing finances and working closely with your factoring partner, small business owners can leverage invoice factoring as a strategic tool to fuel growth and achieve their expansion objectives.

Expansion Opportunites Funded by Future Revenue

Revenue-based Financing offers an alternative funding solution for small businesses looking to fuel growth. This financial tool allows businesses to receive a lump sum upfront in exchange for a percentage of future credit card sales. Unlike traditional loans, RBF  are based on a business’s projected revenue rather than credit history, making them accessible to businesses with limited credit or those in need of quick funding. The flexibility and speed of RBF makes it an appealing option for businesses looking to seize growth opportunities without the constraints of traditional lending processes.

To effectively leverage RBF for small business growth, it’s essential to understand the terms and repayment structure. While RBF offers quick access to capital, they typically come with higher fees and shorter repayment periods compared to traditional loans. Small businesses should carefully evaluate the terms of their specific RBF deal and make sure they have a clear plan for repayment that won’t strain cash flow. 

Make sure to explore multiple RBF providers to find the best fit for your needs, considering factors such as fees, repayment terms, and customer service reputation. By using RBF strategically and responsibly, small businesses can accelerate their growth trajectory and achieve their expansion goals.

Expand with Government-Backed Funds

Small Business Administration (SBA) loans offer a valuable avenue for small businesses to secure financing and foster growth. These loans, backed by the federal government, provide businesses with access to capital for various growth initiatives, including expansion, equipment purchases, working capital, and more. SBA loans often feature longer repayment terms and lower interest rates compared to conventional loans, making them an attractive option for businesses seeking affordable financing options. Moreover, the SBA’s guarantee mitigates risk for lenders, making it easier for small businesses to qualify, even if they lack extensive credit history or collateral. By leveraging SBA loans, small businesses can unlock the financial resources needed to scale operations, enter new markets, hire additional staff, and ultimately realize their growth potential.

Expanding Your Business and Your Receivables

Smart financing can be a strategic move for small businesses aiming to expand their operations and reach new heights of success. Whether through traditional bank loans, SBA loans, revenue-based financing, or invoice factoring, businesses have a range of financing options available to expedite expansion. However, it’s crucial for business owners to carefully evaluate their needs, assess the terms and conditions of each loan product, and develop a comprehensive repayment plan to ensure financial stability and success in the long term. By leveraging loans responsibly and strategically, small businesses can overcome financial barriers, seize growth opportunities, and achieve their goals, ultimately paving the way for expansion and growth that lasts.