Small Business Purchase Order Financing

One of the greatest challenges for small product wholesalers is getting an order too large for them to fulfill. Large orders are good only if you have the financial resources to fulfill them. If you can’t fulfill them, you risk losing the order – and the customer – to a competitor. Being unable to handle large orders restricts the growth of your small business. The only way to break out of this cycle is to get financing to handle larger orders. Is this article we discuss:

  1. Why are large orders a challenge?
  2. How to pay for a large order
  3. What is purchase order financing?
  4. Who can get PO financing?
  5. Conclusion

1. Why are large orders a challenge?

Large orders are a challenge to small businesses because of their financial demands. Let’s look at an example. A small company gets a large purchase order to supply cleaning products to a large corporation. The large corporation places a purchase order with the small company and waits for the product delivery.

The small company is a distributor that does not manufacture cleaning products. Instead, they purchase the products from a factory or a supplier. Their first challenge is that most small businesses have to prepay for products. Some small companies may be able to prepay for the product but end up with dangerously low cash reserves. If the order is large, the small company may not be able to prepay for goods, ultimately losing the client.

There is a second problem. Most large companies demand net-30- to net-60-day payment terms from their suppliers. Even after prepaying their supplier, the small company must wait up to two months to get paid by the large customer. Many small businesses cannot afford to prepay suppliers and then wait 30 to 60 days to get paid by their customers. One option to manage this situation is to use financing to fulfill the order.

2. How to pay for a large order

There are several ways to finance a small business. Each option has its pros and cons. For example, a conventional loan could be helpful for the first large order. However, it may be less useful in subsequent orders as the loan is paid down. Loans are hard to get, can be inflexible, and have amortization schedules. Using amortization reduces the amount of financing as you make payments.

A line of credit would be better. Lines of credit are flexible and can be used as needed. However, they tend to have fixed credit limits and are hard to obtain. In most cases, a line of credit won’t be available to small businesses. Small distributors and resellers with large orders should consider purchase order financing. This solution is specifically designed to handle the financial challenges of large orders.

3. What is purchase order financing?

Purchase order financing helps small businesses by handling their biggest obstacle: supplier payments. The finance company pays your supplier costs directly. This payment enables your supplier to deliver the goods to your customer. The line is settled once your customer pays their invoice in their usual 30 to 60 days. Ultimately, this solution allows small companies to fulfill large orders.

This solution is transactional. You use it only for transactions that need funding. This flexibility enables you to use your cash flow efficiently and pay financing costs only for specific orders. In some cases, purchase order financing is deployed alongside an invoice factoring line. Combining both solutions often lowers your total transaction cost. To learn more, read “What is Purchase Order Financing? How Does it Work?

a) Costs

PO financing costs average 3% per 30 days on the funds employed. This cost varies based on transaction size and details, as there is no standard cost. Due to this solution’s cost, companies shouldn’t use PO funding if they have low profit margins or if transactions take long.

4. Who can get purchase order financing?

One limitation of PO funding is that it can be used only for orders that meet specific requirements. The qualification criteria are as follows:

  • The transaction must involve finished goods
  • The order cannot be for consignment or a “guaranteed sale
  • The transaction must have a minimum gross margin of 25% (this percentage varies)
  • The buyer must have good commercial credit
  • The purchase order must not be cancellable
  • Orders must be for a minimum of $100,000

5. Benefits for small companies

This solution has several benefits that help small businesses. The most important one is that it can help you finance and fulfill large orders. However, there are other benefits. These include:

a) It’s easier to obtain than conventional financing

The most important requirements to qualify are to have an order that can be financed, a creditworthy commercial (or government) client, and a proven ability to fulfill the order. This solution is available to startups as long as they have delivered their product a couple of times. This track record shows the finance company that all logistics have been worked out at the small distributor.

b) The line grows with your business

Most lines don’t have a credit limit, at least not in the way bank lines have a limit. The line adapts to your growing business needs as long as your:

  • Customers are creditworthy
  • Suppliers are reliable
  • Capabilities match the order

c) The line can be set up quickly

The underwriting process is simple. Most lines can be set up for initial funding in a couple of weeks. Subsequent orders can be funded in a few days.

Get more information

We are a leading purchase order financing company and we work with small businesses. For more information, get an instant quote or call us toll-free at (877) 300 3258.