What Is Purchase Order Financing and How Does It Work?

What Is Purchase Order Financing and How Does It Work?

Businesses that receive substantial orders from their clients face a dilemma when they have insufficient cash on hand to pay their suppliers. An effective solution is purchase order financing, which allows you to accept these orders and grow your company. Here is some information to help you decide if this method of funding meets the needs of your business.

The Basics of Purchase Order Financing

Purchase order financing involves interactions between you as the borrower, the financing company, your supplier, and your client. When you receive a large order, you first obtain a cost proposal from your supplier. If funding help is necessary, you apply for and receive approval from a purchase order financing company. The financing company pays your supplier, and the supplier sends the goods to your client. Your business invoices your client, but then the client sends payment to the financing company, which deducts its fees and then remits the balance to you.

Qualifying for Purchase Order Financing

To qualify for purchase order financing, your company must sell products business to business (B2B) or business to government (B2G). This includes wholesalers, distributors, importers, and other businesses that resell finished goods. Your profit margin generally has to be at least 15 percent. The minimum order size varies from $15,000 to $100,000 depending on the financing company. Your clients and suppliers must also have good credit ratings.

When to Utilize Purchase Order Financing

Startups can use purchase order financing as a means to take on significant orders and spur company growth. You can use this method of financing when your business experiences periodic difficulties with cash flow or you have a sudden increase in demand for the products your company offers. You can also utilize purchase order financing if you want to fund orders but your working capital is needed for other business expenses.

For more advice on purchase order financing, contact Champagne Global Capital Lending.