What Is PO Funding?
If you or someone you know is looking for capital to fill a large order, PO Funding may be a good answer for you. What happens when you receive a purchase order or contract and you don’t have the capital to fill the orders? Canceling the order is certainly not an option. Relying on vendors to stretch payment terms and “trust” you to deliver and pay is probably a stretch. Bank loans and standard lines of credit will take too long and will most likely not provide enough availability. PO Finance is probably your best option, some call it a Purchase Order Loan.
Is PO Funding Right For Your Business?
PO Funding provides you with financing to fill large orders on time, keeping both your vendors and customers happy. If you are looking to receive a cash advance against the purchase order or leverage it for a line of credit, it probably won’t happen. When a lender provides Purchase Order Financing they will help you purchase the goods for resale directly from the supplier and will expect some control through the delivery process.
Definition of PO Funding – When a lender helps a supplier purchase goods for resale to their end customer based off of a qualifying purchase order. AKA purchase order financing, it is not a loan but more of a service or financial accommodation.
Hopefully this is helpful so far. While the concept here is simple, understanding the process can be somewhat complex. At least it can be complex if it is not explained properly. To help you understand how the purchase order financing process works i have outlined it below for you.
- You issue a proposal to sell your products to your customer.
- Your customer issues a purchase order to buy goods from you.
- You confirm with your vendor that the products or materials are available to order so you can ship to your customer.
- PO Funding company issues payment to your vendor for goods(if finished goods) or raw materials(if Work In Process). Payment is typically issued after an inspection of some sort conducted by a third party.
- Goods are delivered directly to end customer or to a public warehouse for pack/ship/etc.
- You invoice your customer for products sold.
- Your Accounts Receivable Factor advances against the invoice and pays back the finance company. In some cases this works with an Asset Based Loan as well.
- Wash, Rinse, Repeat.
The most frequently asked questions about PO Funding:
- How much does PO Funding Cost? – Purchase Order Financing can range from 2-6% per 30 days based on the exposure in a transaction. The finished goods transactions will cost 2% while the more complex Work In Process transactions can cost closer to 4-6%. Other fees include pass through bank fees, inspection costs, etc.
- Are there any up front fees? – There shouldn’t be any up front fees. A legitimate purchase order finance partner should be able to look at a transaction and know right away whether or not it’s something they can help with. The only up front fees should be for basic due diligence that is conducted on the client company.
- How long does it take? – Getting a new client set up with a lender should take no longer than 3-8 business days. Setting up a new transaction for financing should take no longer than 24 hours if everything is in order.
- What documents do I need to successfully complete a transaction? – Depending on the opportunity the minimum documents will be a purchase order from your customer, a pro-forma invoice from your vendor, and any supporting documents requested by your lender.
- Do I always have to have goods inspected during the process? – Most lenders will require an inspection from a 3rd party prior to purchasing goods for you. The inspection takes place at the manufacturer or supplier prior to shipment.
- Who handles the inspections for a PO Funding transaction? – The inspections are typically handled by a 3rd party like SGS or Intertek. They are two of the worlds largest inspection companies with employees all over the world.
Do you have any other PO Funding questions that we can add to our FAQ? Send us an email today. If we add your question to the site we will send you a free MRKT Capital T-Shirt and some other great swag!
Here are a few tips on how to find a strong PO Funding company.
Looking for a good Purchase Order Financing resource? Hopefully you are not throwing darts at the Google search results. Purchase Order Finance is a very specialized field. The wrong financing partner can interrupt your supply chain. Alienating your vendors and losing the trust of your customers is not something your business can handle. While many lenders claim to offer Purchase Order Financing services, there are few that do it well.