What is Purchase Order Financing?
Firstly, a purchase order represents a commitment by a customer to buy goods from a product distributor or re-seller.
Purchase order financing (PO financing or PO funding for short) then, is a type of asset-based financing that is ideal for re-sellers or distributors that have reached their lending capacity and cannot fund raw materials to fill all their orders. This strategy may become necessary for small businesses or newer businesses that are having trouble being approved for a bank loan, or if some larger clients have been acquired that order more than the business is used to handling.
How does purchase order financing work?
- The company receives their purchase orders
- The orders are assigned to the lender
- The lender finances the purchase of raw materials
- Once the orders are filled, the lender is paid
- The lender deducts their cost and fees
- Then they give the remaining profit to the company.
To qualify, the customers must be quality commercial or government businesses, ideally. The business in need of financing must also have a minimum of $50,000 in monthly sales with a gross profit of 20%.
One thing to keep in mind here is that often this type of financing will have a higher interest rate. Ensure you’re prepared for this so you can remain profitable and keep your business healthy and growing!
Learn more about PO financing and the purchase order process.
If you’re interested in this type of financing for your company, maybe to start accepting some larger orders, fill out our simple form to find out if you’re qualified, or contact us and we’ll be in touch shortly!