Purchase Order Financing
Get your orders fulfilled and your suppliers paid without impacting cash flow.
Factoring Lines
$200K – $7 Million
FICO Score
No Requirements
Funding Turnaround
As little as 4 days
Available Through
The Purchase Order Financing Process
What to Expect
Purchase Order Financing at a Glance
Factoring Lines
$200K – $7 Million
FICO Score
No Requirements
Funding Turnaround
As little as 4 days
Available Through
Kapitus Financing Network
Purchase Order Financing 101
Purchase Orders & Cash Flow
Taking on significant customer orders can often push a small business past their capacity, especially if they lack the cash necessary to purchase supplies for fulfillment. Yet, passing on those orders may hinder business growth and tarnish a good reputation.
This is where Purchase Order Financing can be a small business’s ideal solution to accept and fulfill large orders, even if you don’t have the working capital needed on-hand.
What is Purchase Order Financing?
Purchase Order Financing is a short-term financial solution that helps small businesses fulfill large customer orders.
Using this arrangement, a financing company will provide the funds necessary for a small business to cover the costs associated with fulfilling a customer’s purchase order. Once goods are delivered, the customer then repays either the business or the financing company directly – depending on your agreement – who then forwards the payment to the small business, minus a financing fee.
Purchase order financing is particularly beneficial for businesses lacking the cash to complete large orders without depleting their existing resources.
Benefits of Purchase Order Financing
Benefits of Purchase Order Financing
Take on big orders without sacrificing cash flow and growth opportunities.
Outsourced Collection
Your purchase order financing company can take on the responsibility of payment collection, freeing up your time and resources.
Elevate Your Standing
Meet customer demands, pay your suppliers, and keep your reputation intact without impacting your cash flow.
Expanded Capacity
Confidently take on orders that you may not have been able to with low debt exposure
Minimum Requirements to Qualify for Purchase Order Financing
As with all financing options, there are minimum requirements needed from the financing company to evaluate your eligibility and determine the terms of your arrangement. In the case of purchase order financing, there are requirements that you, your customer and your suppliers must meet.
Here are the requirements for each party involved in a purchase order financing agreement:
- Your company must be categorized as B2B (business to business) or B2G (business to government).
- Your company must provide physical goods.
- Your supplier(s) must have good business credit.
- Your customers must have good business credit, trade, and payment history.
- Orders must have a minimum profit margin of 10 percent.
Understanding Purchase Order Financing Requirements
Purchase Order Financing is one of a handful of financing products where approved funds are paid out to a third party. Because of this, minimum requirements are based more heavily on your clients and your suppliers’ business profile than your own. Here are some of the most critical factors considered when applying for purchase order financing.
Your Clients
Purchase order financing has a high minimum funding amount requirement, along with strict business credit requirements for the company submitting a purchase order. Because of this, general consumers are not able to meet these requirements and PO financing can only be used by B2B or B2G companies.
Your Products
Built to cover the cost to manufacture or purchase physical goods when you don’t have the cashflow to cover these costs to meet demand. Service-based businesses don’t have the same production cost requirement and therefore do not qualify for purchase order financing.
Your Profit Margin
Responsible lending requires that the cost of financing does not put a business at risk for failure. Purchase order financing is designed to allow businesses to take advantage of an opportunity to generate profit they would otherwise not have due to cash flow limitations.
Of course, these are not all of the criteria taken into consideration during the underwriting and review process for purchase order financing. A more comprehensive review of the health of your business along with the reputation of your suppliers and the creditworthiness of your customers are also key considerations for approval.
Need More Info on Purchase Order Financing?
Speak with a Kapitus Small Business Financing Specialist to learn more.
How can Small Business Owners Use Purchase Order Financing to Fuel Growth?
Here are a few of the many ways that small business owners can leverage purchase order financing to generate profit and grow their business.
Fulfill Large Orders
Secure purchase order financing to cover costs for substantial orders to meet demands that you would have to decline otherwise due to lack of cashflow.
Secure New Clients
Bring on new clients or accept large orders from existing clients without having to worry about maxing out your available cash and interrupting day-to-day operations.
Enter New Markets
Purchase order financing can cover expenses associated with expanding your business to new markets, increasing your visibility and reach.
Manage Seasonal Demands
Use purchase order financing to handle seasonal fluctuations to keep your clients satisfied and your operations running smoothly during both peak and slow periods.
Understanding Purchase Order Financing
How Does Purchase Order Financing Work?
Purchase order financing is a flexible and short-term financing option that makes it possible for small businesses to take on large orders that they may not have been able to unassisted.
Here is a step-by-step explanation of the Purchase Order Financing process:
- A small business receives a large customer order that exceeds their current financial capacity.
- Before fulfilling the order, the business must pay their suppliers for the required goods and secure the inventory needed to meet the customer demand.
- The business applies for purchase order financing from a financing company. This company will assess the agreement based on the customer’s creditworthiness, the purchase order’s value, and the business’s track record.
- Upon approval, the lender provides the necessary funds to cover the production or purchase costs associated with the purchase by paying their suppliers directly. This funding allows the small business to fulfill their customer’s order.
- Once completed, the goods are delivered to the customer and completes the transaction.
- The customer then makes payment to the purchase order financing company, bypassing the small business.
- Once payment is received, the purchase order financing company deducts its fees, costs, and the amount that was advanced, and then returns the remaining funds to the small business.
- The process is complete and the business is able to successfully fulfill the customer’s order without facing cash flow constraints.
Pros & Cons of Purchase Order Financing
Funds obtained through purchase order financing can be a valuable tool for small businesses facing challenges fulfilling large customer orders. But while it can provide an ideal solution, it’s essential to weigh the pros and cons to ensure that purchase order financing is the right choice for your business.
Advantages of Purchase Order Financing
There are many advantages to Purchase Order Financing for small businesses, including:
Working Capital Preservation
Allows businesses to fulfill large orders without depleting existing working capital.
Business Growth
Gives businesses the opportunity to accept significant customer orders, helping to enable business profitability and growth.
Improved Reputation
Enables businesses to fulfill orders promptly, enhancing their reputation and customer and supplier relationships.
Flexibility
Suitable for businesses facing seasonal demand fluctuations or those with sporadic large orders.
Limited Debt
Unlike traditional loans, purchase order financing is a short-term solution that doesn’t add long-term debt.
Accessible for Startups
Provides financing opportunities for newer businesses and businesses with limited credit history.
Scalability
Adaptable to varying order sizes.
Customer Retention
Ensures the ability to meet customer demand, preventing order refusal and potential loss of clients.
Quick Funding
Offers a relatively quick funding process, allowing businesses to respond promptly to customer needs.
Disadvantages of Purchase Order Financing
While Purchase Order Financing can provide valuable benefits, it may also come with some disadvantages, including:
Cost
Purchase order financing can be relatively expensive, with fees and interest rates that may impact profit margins.
Not For Every Business
Purchase Order Financing is limited to B2B and B2G companies and typically only covers the cost of goods needed to fulfill orders and not other business expenses.
Creditworthiness
Approval often depends on the creditworthiness of the customer that placed the purchase order along the reputation of the suppliers you are using – both of which you have no control over.
Complexity
The process, while quicker than other financing options, can be complex, involving multiple parties and meticulous documentation.
Not a Long-Term Solution
Purchase Order Financing is a short-term solution and may not be suitable for businesses requiring ongoing financial support.
Who Should Use Purchase Order Financing?
Purchase order financing is designed for B2B or B2G businesses who supply physical goods, including companies who produce goods on a large scale, businesses involved in bulk distribution, or companies who deliver goods to retailers.
Here are a few industries where PO financing is common:
- Manufacturers — Securing funds for large production orders.
- Wholesalers — Funding for bulk inventory purchases.
- Distributors — Working capital for efficient distribution.
- Outsourcers — Funding to cover costs of outsourcing.
- Resellers — Acquiring the inventory for resale.
How Much Does Purchase Order Financing Cost?
The cost of purchase order financing will vary depending on a number of items associated with the deal, including the:
- specific terms and complexity of your financing agreement
- creditworthiness of your customers
- reputation of your suppliers
- size of the payment being made to your suppliers
- the length of time that the funds are outstanding once the product has been delivered to your customer.
The total cost will be dependent on how long it takes your customer to pay the invoice that was sent for their purchase order – with the outstanding amount incurring a 1.8% to 6% fee per 30-day period. The percentage typically increases the longer it takes your customer to fulfill the invoice amount.
Getting Started with Purchase Order Financing
Before You Apply
Before getting started with the application process, it’s important to do some research to determine if purchase order financing is the right choice for you and your business. Here are some things to consider:
Evaluate Your Needs
Assess your current financial situation to determine how much funding you need to fulfill an outstanding customer purchase order. Consider whether attempting to fulfill it on your own would deplete your working capital and compromise your financial stability.
Make Sure You & Your Customer Qualify
Creditworthiness impacts the approval process. Review both your credit score and that of your clients to identify any potential issues and determine if they can quickly be addressed.
Review Your Supplier’s Reputation
The reputation of your suppliers are a critical component in purchase order financing approval. Check your supplier’s reviews, ensure they are not or have not been involved in any law suits on the quality and safety of the items they produce, and confirm that they engage in ethical business practices and product production.
Research & Select Your Purchase Order Financing Company
How to choose a Purchase Order Financing Company
The financing company you choose to work with can make all the difference in your financing experience.
Look for a purchase order financing company with experience in your specific industry and one that has positive online reviews and customer testimonials. One option to secure a reliable partner for purchase order financing is to let Kapitus connect you with a purchase order financing company from our trusted financing network.
Purchase order financing through Kapitus can be the ideal solution that ensures that your company never has to turn down large customer orders and miss out on growth opportunities.
How do I Apply for Purchase Order Financing?
Applying for Purchase Order Financing through Kapitus is a hassle-free and straightforward process.
Simply follow the steps outlined below:
- Complete the short online application
- Upload 3-6 bank statements
- Meet your Financing Specialist
- Discuss terms
- Finalize your agreement
I’ve Been Approved for Purchase Order Financing – Now What?
Congratulations! Once you are approved for purchase order financing, the next step is to finalize the details of your financing arrangement.
Once the terms have been settled, your financing company will pay your suppliers directly. After goods are delivered, your customer will pay your financing company directly. Your financing company, in turn, will deduct their fees from that amount and send the remainder of the payment to you.
What to do if You’re Declined for Purchase Order Financing
If you find that purchase order financing isn’t an option for you or your client, then please do not consider your funding journey to be at an end.
Kapitus offers a range of financing products that may be a better fit for you and your business. If you need assistance, feel free to reach out to one of our financing specialists who can provide valuable guidance and help you find the financing solution that fits you best.
Table of Contents
How does Purchase Order Financing Work
Pros & Cons of Purchase Order Financing
Who Should Use Purchase Order Financing
How Much Does Purchase Order Financing Cost?
Get Started with Purchase Order Financing
How do I apply for Purchase Order Financing
I’ve Been Approved for Purchase Order Financing – Now What?
What to do if You’re Declined for Purchase Order Financing.
Ready to Get Started?
Applying for purchase order financing is easy! To get started fill out our short online application and one of our financing specialists will be in touch shortly to walk you through the rest of the process.
Purchase Order Financing FAQs
What Companies are a Good Fit for Purchase Order Financing?
Kapitus’ Referral Program is designed specifically for organizations and professionals who work with business owners on a daily basis. As a direct lender, we can offer your clients the opportunity to get financing when they need it, while rewarding you generously for each successful referral. The Referral Program also equips you with advanced training and support, and a wealth of marketing resources for your convenience.
Do I need a good credit score to qualify for PO financing?
- Attractive referral fee income for additional revenue stream
- Enhanced client relationships and increased customer retention
- Add business financing to your product portfolio and services menu
- Opportunity to market your products and services to the Kapitus client base
What is the difference between purchase order financing and invoice factoring?
- Attractive referral fee income for additional revenue stream
- Enhanced client relationships and increased customer retention
- Add business financing to your product portfolio and services menu
- Opportunity to market your products and services to the Kapitus client base
Is Purchase Order Financing a Loan?
- Attractive referral fee income for additional revenue stream
- Enhanced client relationships and increased customer retention
- Add business financing to your product portfolio and services menu
- Opportunity to market your products and services to the Kapitus client base
Can a newer business use purchase order financing?
Yes, purchase order financing is available to newer, “startup” businesses. Review your credit history and that of your client’s to determine if purchase order
financing is the right financing solution for your needs.
How do purchase order financing companies work?
Purchase order financing companies work by providing short-term funding to businesses that have received a large purchase order from a customer but lack the capital to fulfill it.
Once a business is approved for purchase order financing, the financing company pays the business’s suppliers directly for the material and production needed to fulfill the order.
Once goods are delivered, the customer pays the invoiced amount directly to the financing company, bypassing the business. The financing company will then deduct its fees from this amount and return the remaining funds back to the business.
What parties are involved in purchase order financing?
There are four main parties involved in a purchase order financing agreement:
Small Business — The company that receives a purchase order and seeks financing to access the necessary funds to fulfill it.
Customer — The entity who issues the purchase order to the business, expressing their intent to buy specific goods.
Supplier – the company or companies used by the small business to supply or manufacture their goods.
Financing Company — The company that provides the funds needed for the business to fulfill the purchase order.
How does purchase order financing payback work?
Once you have received funds to fulfill a customer order, your customer will pay the financing company directly, who will then send you the remaining balance, minus fees.
What is the difference between purchase order financing and invoice factoring?
Purchase order financing and invoice factoring, sometimes known as accounts receivable factoring, are two different financial solutions that are often mistaken for each other. Here are some key differences:
Timing — Invoice factoring is used after your business has issued an invoice to a customer for goods or services already supplied. Purchase order financing is used prior to delivering finished goods to a customer and covers the costs from suppliers before fulfilling the order.
Scope of Use — While invoice factoring is available for any company providing goods or services, purchase order financing is exclusively used for companies who deal in physical goods.
Release of Funds — An invoice factoring company releases funds directly to the business, while in purchase order financing, funds go directly to the business’s suppliers to cover materials and production costs.
Debt Structure — Invoice factoring involves selling your invoices to a 3rd party, making it a transaction and not a loan. Purchase order financing, on the other hand, is a form of shor-term business financing and is a form of debt.
Is purchase order financing a Loan?
No, purchase order financing is not a business loan. Instead, purchase order financing involves receiving an advance to cover the costs associated with fulfilling a specific purchase order, and is considered a form of short-term debt financing but it is not, by definition, a loan.
What is the difference between Purchase Order Financing and a Traditional Business Loan?
Purchase order financing is a specialized and more flexible financing option made for businesses who lack the working capital to fulfill large customer orders. It focuses specifically on providing funds to cover costs associated with fulfilling an order, often using the order itself and the goods as collateral.
Traditional business loans, on the other hand, offer financing support for various business needs, such as operations, expansion, or large equipment purchases. They typically have a larger range of collateral requirements, require regular installment repayments, and focus on the overall creditworthiness and stability of the business.
Is Purchase Order Financing Debt?
Yes. Purchase order financing is considered a form of short-term debt.
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