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PO Financing vs. Line of Credit

Stephen Halasnik

PO financing—or purchase order financing—is one way a small business can fulfill a customer’s order even if it can’t afford the supplies to produce the goods. Here’s what we mean: Let’s say your company wins the manufacturing contract of your dreams. It’s a huge order, and the customer is ready to send you the purchase order. However, when you look into how much the supplies cost to complete the order, your dreams turn into nightmares—your new business doesn’t have the funds to buy the supplies needed topo financing fulfill the order.

That’s where PO financing comes in. PO financing companies exist just for this—and other reasons businesses might need funds upfront to deliver an order. Purchase order loans are based on the understanding that once the product is delivered to the buyer, the buyer will pay the invoice, and the PO finance company will recoup its investment plus fees (depending on the purchase order financing terms agreed upon).

What Is PO Financing?

The PO in finance terminology refers to a purchase order. The purchase order is the document created by the buyer and sent to the seller that outlines the products sold that are to be delivered by a specific date for a particular amount of money. Once the seller signs the PO, the PO acts as the official contract between buyer and seller.

Buyers use purchase orders to request products without having to make payments upfront. Instead, the seller (that’s you) accepts the PO as a commitment and legal document ensuring payment once the product is delivered. The other participant in this relationship is the supplier. The supplier is the vendor you use to supply the materials and services needed to create the product. If your business does not have the money to obtain the supplies, PO financing companies help with the funding of purchase orders, so you don’t lose any business due to a lack of funds.

Don’t confuse this with invoice factoring, which companies might use after a sale has been made, and the customer has received the order. PO financing is used before your business has delivered the finished product. PO financing comes in handy for:

Can any business use PO financing? The short answer is no. For a company to qualify for PO financing, the business must sell a completed product—a PO for service-related companies does not qualify.

How Does PO Financing Work?

Once your business receives a purchase order, you and your team must scrutinize the number of goods the customer requests. Is it feasible to fulfill that order with what your company has in stock, or will you need to acquire additional supplies to complete the order in time? And finally, do you have the money on hand to purchase the supplies from the vendor? To make this calculation, you need to get cost estimates from the supplier/vendor.

After receiving an invoice from the supplier for the necessary materials, you’ll be able to determine whether you should seek PO financing. If you can’t afford to buy the supplies needed to complete the order, it’s time to find a PO financing company. PO financing rates and terms vary by company, so be sure and get referrals from other businesses and check online sources like Trustpilot. Depending on your business’s qualifications, the purchase order amount, the supplier’s standing in the industry, and the customer’s creditworthiness, the PO financing company could finance anywhere from 80-100% of the purchase order amount. If the lender approves anything less than 100%, your company must make up the difference.

The next step is where PO financing diverges from typical short-term business loans. Once the loan has been approved, the PO financing company pays the vendor directly for the supplies. The money does not come from you—unless you are required to make up the loan shortfall. Once the supplier gets paid, the goods are manufactured and delivered to the buyer. It is most likely that the supplier will deliver the completed order.

After the supplier notifies you of delivery, your business sends the invoice to the buyer—with the PO financing company’s remit information. That’s because the payment will go directly to the PO financing company instead of your business. The longer the buyer takes to pay the invoice, the more it will cost your business in fees, so it’s in your company’s best interest to stay on top of the payments process. The faster the buyer pays, the sooner you get paid by the PO financing company.

The final step in PO financing happens after the lender receives the money from the customer. They then distribute your share of the purchase order to you—basically, the amount of the PO minus the fees you owe the lender.

Small Business Line of Credit as an Alternative

While PO financing has its advantages, the high fees and often steep qualification requirements make it unfeasible for many businesses to take advantage of. As stated above, the longer the customer takes to pay the invoice, the less money the company gets once everything is settled. Plus, there’s no guarantee you’ll get the entire amount you need financing for, especially if the customer has a less than stellar financial reputation. PO financing companies might also require the PO to be for a minimum amount, for example, over $20,000. Lastly, PO financing is only for companies with physical products to deliver, so this funding option is not for you if you own a service business.

However, since time is always of the essence when you get a product order, you should be prepared ahead of time. It’s a good idea to create a financial backup plan, like getting a Financing Solutions’ Line of Credit.

A line of credit is a fixed fund amount loaned to the borrower that can be used for any purpose. The borrower (the business) can withdraw money as needed up to the credit line limit. Once you repay the money, you can borrow again. Again, you can use your line of credit for anything, including PO financing, or if traditional PO financing doesn’t cover the total amount you need.

Financing Solutions can offer a line of credit like this because Financing Solutions is funded not through government and depositors’ funds but by private investors. Fill out an online application today!

 

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