Purchase Order Finance: The cash you need to start the work

Purchase order finance is a popular and effective method for businesses looking for a quick way to finance their purchase orders.

What is purchase order financing?

As its name suggests, it is a form of finance secured on a purchase order, the agreement issued by a buyer to a company setting out the prices and quantities for a product or service when they are ready to buy.

Securing a major order, supported by paperwork in the form of a purchase order, is a major plus – but it can mean challenges for your business:

• First, your business needs to pay its suppliers before it can produce the goods to fulfil the order
• Second, depending on the business sector, the customer may have lengthy payment terms, in some cases up to 120 days.

Paying the supplier and waiting for payment from the customer can mean a cash flow problem for the business. They need substantial finance to cover the period from receiving the order until they get paid by the customer.

Purchase Order Finance, or PO Finance, provides funding for businesses to pay their suppliers and smooth out cash flow. It is a form of cash advance secured against a confirmed Purchase Order.

To find a type of finance to works for you, speak to Rangewell today!

How Purchase Order Finance helps you grow

Your company may simply not have the cash reserves it needs to handle a large order, particularly in its early stages. You will need to purchase supplies, pay personnel and cover all related expenses, from admin to packing and delivery.

Because you won’t be getting paid until long after the job is complete, it can look impossible for your business to handle large clients, even if you have the skills and the production capacity.

Obviously, you can’t afford to turn those large clients down. PO financing allows you to accept large orders from trusted clients, by ensuring you have the money for supplies.

It means you can afford to take on large orders and big clients, ensuring that you can grow your business fast.

How Purchase Order Finance works

With Purchase Order Finance, the finance company will first need to see a confirmed Purchase Order from a relatively well established and financially secure customer. They will want to ensure that your buyer is really in a position to pay for the goods once they have been completed.

They will then make a cash advance to your business, which will allow you to buy in supplies and deal with other costs. The level of funding will depend upon your business sector, the value of the order and the costs you face, and the strength of your customer, the company issuing the Purchase Order. This advance may not be for the entire amount of the order, although some arrangements may provide a high percentage of the total value.

Once work is complete, the Purchase Order Finance company will collect the payment from your end customer. They will then deduct their fees in return for the facility, which will be made up of interest as well as a charge for the transactions, and transfer the remainder to you.

Alternatively, you can allow the Purchase Order financing company to open up a line of credit with your supplier. The line of credit will be opened in their name and backed by them, allowing new businesses and those with a poor credit record to get the supplies that they need.

The advantages of Purchase Order Financing

• Easy to arrange: Purchase Order Financing from a specialist provider may be easier to qualify for than bank financing. It may be possible to arrange even if your business does not have a high credit rating, as it is actually the creditworthiness of your end-user customer who creates the purchase order that acts as the security for the cash advance.
• Frees up cash: When you use Purchase Order Financing, you can use your cash reserves for your other operating costs, such as advertising and fulfilling other jobs. Demands on your operating capital are reduced.
• Reinforce your cash flow: PO Financing can provide a steady source of cash that keeps pace with your business operations. The more work you do and the more purchase orders you receive, the more cash you can call on.
• Funding growth: Purchase Order Financing can help your business grow by allowing you to take on large customer orders and repeat business that would otherwise be beyond your financial resources. Having cash upfront allows you to negotiate better deals on supplies and to bring in staff and machinery that would otherwise not be affordable.

By ensuring that you never have to turn down a profitable order because it is beyond your resources, it means your business can grow as fast as you can find customers for your finished goods.

The disadvantage of Purchase Order Financing

• The high fees may eat into your profit margins: Typically, lenders can charge anywhere from 1.8 to 6% per month with an APR of 20% to 75%. It's still cheaper than a short term loan or merchant cash advance but can be expensive for small business loans.
• Purchase order loans aren't too flexible: They're solely used to cover the cost of fulfilling the order - you can't use them for anything else.
• This type of financing is only available for a service-based business: In addition, you'll need physical products to qualify. 
• Customers will work directly with the lender instead of your business: They may question your business health and start exploring alternatives if you cannot deliver in the future.

You should bear in mind that purchase order financing is a short-term loan. However, it will give you quick access to cash, which you'll pay back in a month or two.

PO Financing includes collections

The Purchase Order Finance company will not only advance you the money, but they will also collect payment from your client. This eases your administrative burdens, freeing your team for productive work.

• It lets you target larger customers and take on larger orders safe in the knowledge you can call on the finance you need
• You don’t need an established credit record - with a confirmed order from an appropriate customer typically no additional security is required
• You can negotiate better deals with your suppliers, as you can be a cash purchaser
• You can preserve your working capital
• You can support your growth plans, and target larger customers.

Is it right for your business?

Purchase Order Finance has grown steadily in recent years, as the availability of bank financing, such as overdrafts, has decreased. It may work best if your business has relatively high-profit margins and ambitious growth plans when it can provide a competitive source of the funding you need to maintain growth momentum.

Financial solutions from Rangewell

The rates and terms offered by Purchase Order Finance providers vary, and it is important to have expert help to get the most competitive provider for your business type, your sector and your turnover.

At Rangewell, we can use our financial expertise to support your business with all of your invoice finance options – and ensure that you have the financial solutions you need, including:

• Single Invoice Finance
• Stock Finance
• Trade Finance
• Whole Ledger Finance

We can help source providers who can provide solutions tailored to your sector - reducing your costs and increasing the levels of funding that you can call on.