Purchase order (PO) financing helps wholesalers that have large orders and need funds to pay their supplier expenses. The solution provides funds to pay suppliers, which enables you to fulfill larger orders and grow your revenue.
PO financing has simple qualification requirements and is more flexible than bank financing. Furthermore, most lines can be set up quickly. Commercial Capital LLC provides services in the US and Canada.
We offer purchase order financing at competitive rates and can work in most industries. Fill out this form for an instant quote. To speak with an expert, call us toll-free at (877) 300 3258.
Purchase order financing has several advantages over other financing solutions. The most important benefit is that your company will be able to fulfill larger orders. Additionally, a PO funding line:
- Is available to new companies/start-ups
- Grows with your business
- Is transactional (use as needed)
- Can be set up quickly
- Is easier to get than bank financing
How does purchase order financing work?
PO financing covers the supplier expense of your purchase order. The finance company handles the supplier payment directly, usually using a Letter of Credit (LC). Most transactions are executed as follows:
- Finance company issues an LC to your supplier
- Supplier manufactures and delivers products
- Your customer receives products
- Your customer pays the invoice (net-30 to net-60)
- Transaction settles
There are two ways to settle the transaction. The purchase order finance company can settle the transaction once your customer pays the invoice. Alternatively, transactions can settle through a factoring line. This method may lower transaction costs for many transactions.
To learn more, read “What is Purchase Order Financing? How Does it Work?”
The requirements to qualify for purchase order funding are simpler than those of comparable solutions. Consequently, it works well with start-ups and growing companies.
1. Have you sold this product before?
Purchase order financing can be used by start-ups. However, they must have sold the product at least once before a transaction can be financed. This requirement ensures that the company has worked out the procurement and logistical aspects of the transaction.
2. Are you a wholesaler/reseller?
Purchase order funding is available only to companies that buy and resell goods to commercial clients. It can also be used by companies that use third-party manufacturing. Unfortunately, it cannot be used for other transaction types.
Note: Companies that manufacture goods directly should consider supplier financing instead.
3. Do you sell to commercial or government clients?
This solution can be used only to finance commercial sales. Your client must be either another company or a government agency.
4. Are your POs over $100,000 in value?
This solution can be used only to finance orders that have a minimum value of $100,000. Unfortunately, we are unable to finance smaller orders.
5. Are your gross margins over 20%?
Purchase order financing works best for transactions with a minimum gross margin of 20%. A gross margin that exceeds 30% is preferred. Unfortunately, PO financing does not work with lower-margin transactions.
6. Do you sell on consignment/guaranteed terms?
Your purchase order cannot have a consignment or “guaranteed sale” clause. Both clauses enable end customers to return unsold products. Consequently, they can’t be financed.
The PO financing rate is determined by the transaction’s parameters. These parameters include the credit quality of your clients, your supplier’s reputation, the risk profile of the orders, and your company’s industry experience.
Fill out this form to get an instant quote. Call us toll-free at (877) 300 3258 to speak with a representative.
How to evaluate PO finance companies
You should evaluate potential financing companies before becoming a client. This step ensures that you choose the best company to finance your transaction.
1. How long have they been in business?
You are usually better off working with a purchase order financing company that has been in business for a few years. This usually indicates they have industry experience and know-how to manage their portfolio.
2. What is their main line of business?
Many factoring companies offer purchase order financing as an “accommodation” to existing customers. However, few companies specialize in PO financing.
You usually get better results if you work with a company that specializes in purchase order financing. They have the technical knowledge to handle complex transactions.
3. What supplier payment methods do you support?
This support varies by company and transaction. Some purchase finance companies offer only letters of credit. Most also offer “cash against documents” and similar methods.
4. How does the due diligence process work?
Most purchase order funding companies follow a similar due diligence process. However, each company has its own procedures. Ensure you are comfortable with the process before signing on as a client.
5. Are there any due diligence fees?
Most purchase order finance companies charge a due diligence fee. This fee helps defray the cost of reviewing the transaction, filing the proper documents, and setting up the account. Inquire about these charges before signing on with the finance company.
For more information, read “How to Select the Right Purchase Order Financing Company.”