Purchase Order Financing – The Basics
Your business is booming, you’ve got orders – lots of orders. The prob
lem is cash flow – there will be times when there is simply not enough money to cover the cost of doing business. As a result, there may be an order from a client that you cannot fulfil due to lack of available funds. Turning the order down is now an option. To avoid such scenarios, purchase order financing may be a good solution.
How can purchase order financing help and how does it work?
Purchase order financing pays up to 100% of the funding you need and can provide additional capital beyond what you might typically be approved for based on your books. Here are a few highlights of how this type of financing works:
- A purchase order is required from the customer
- Applies to finished goods only
- Goods must be shipped directly to the debtor
- Financing doesn’t cover deposits, the client must cover all deposits
Purchase order financing is quite easy to qualify for. Unlike bank financing, you are not required to have an excellent credit rating. What is important is the credit standing of the company who has placed an order with you, not your business itself. This makes purchase order financing a good option for new businesses and those with an average credit rating.
Supply Chain Financing 101
How can you buy more time to pay suppliers? Or maybe you want to secure funding now with a promise to pay early? With no cost to your supplier to extend terms and working capital at your disposal to ensure seamless order delivery to your customers – supplier credit seems like a win for everyone.
If business (and your credit) is good but other factors are impacting your access to funding, then supply chain financing is worth exploring as an option.
How can supply chain financing help and how does it work?
First of all, supply chain financing is a solution that does not require a purchase order. If your business has good credit and doesn’t have purchase orders this option may be suitable for your cash flow needs.
Financing can be obtained for finished goods, raw materials, general inventory – or whatever it is that you need. Here are the key elements of how this type of financing works:
- Financing will cover all deposits and final payment
- Funder buys goods and sells them to the client immediately thereby converting the loan to an account receivable (A/R)
- Goods are generally shipped to the client
Typically, when the funder converts the loan to an account receivable insurance is required. It is because of this insurance that we recommend you have good credit to explore this option. Receivable insurance is used to back stop the transaction in the event of non-payment.
Are you facing a large order and in need of capital? Let’s explore options for your business with working capital solutions that can solve your immediate cash flow problems.