Purchase order finance can help your business thrive
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A purchase order is an order form given by the buyer to the seller. When the order form is accepted, the agreement between the buyer and seller will then be arranged. For example, they'll agree on the prices and quantities of the product or service between them.
Purchase order finance, also referred to as 'PO Finance', will help pay suppliers to help smooth out their cash flow.
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!
Is purchase order finance the right choice for your business?
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.
We can help with both brick and mortar and ecommerce businesses
Find out what finance type is most suitable for your business
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:
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.
REAL EXAMPLES OF WHAT WE CAN DO
Help arrange funding for a bathroom fitting company supplying a major developer
Find an arrangement for a plastics company providing an IT manufacturer
Find finance to let a shoe company fund a large overseas order
Source funding to support a furniture manufacturer supplying a government contract
Arrange funding for a new electronics hardware business with a major order from a high street retailer
We got in our first big orders from a large corporate customer - but we knew it would mean long delays on payments that we could not afford. Purchase Order finance was the solution.
We had some big plans for growth, but we needed the finance. Purchase order finance means we don’t need to borrow - we can afford to take on big orders as we get them.
We were going to turn down the best contract our paper supply business ever had, because the customer would keep us waiting for 120 days before they paid. With Purchase Order finance we could afford to wait for their payment.
Our goal is very simple - to help businesses find the right type of finance as quickly, transparently and painlessly as possible.
Helping you build your profits
Accelerate your cash flow
Purchase Order finance effectively accelerates cashflow, so that instead of waiting for customers to pay within their normal credit terms, you receive cash as soon as they order.
Funding for the entire process
Purchase Order finance will allow the whole trade cycle to be financed right from the initial purchase order through to the end customer settling the invoice.
A solution for growth
Purchase Order finance can be a solution for businesses that are growing at a rapid rate, and need the cashflow to fund continued growth.
Avoid the need to ask for deposits
A large customer issuing a large purchase order may expect credit terms and be unwilling to pay any kind of deposit. Purchase order finance can allow you to take on the work with funding in place.
Purchase Order Finance is flexible. Once set up, the facility can grow or reduce in relation to the level of orders you receive.
Purchase Order finance can provide funds very quickly. In the current economic climate, when many forms of business lending can be difficult to secure it can provide cash for large orders as soon as it is needed.
Download Rangewell’s free and detailed guide to Purchase Order Finance
The principles behind all types of invoice finance, including Invoice Factoring and Invoice Discounting
Why not all funding providers are equal
How we can help you pay less
The downsides to Purchase Order Financing - and how to avoid them
How to arrange Purchase Order Finance - What paperwork do you need?
We can help source the right long- or short-term commercial capital financing solution for growing businesses.
Can Purchase Order Finance help with my business cash flow/working capital?
Is Purchase Order Finance similar to invoice discounting?
How this finance facility works, including paying the supplier, letter of credit, payment terms, customer orders, who fulfils the order
What PO finance provides to SMEs
Do many UK companies use short term business loans?
Do many businesses in different sectors use finance solutions such as PO Finance?
Does the lender become the company paying the customer invoice or does my business settle it?
Key terms explained
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Costs may be highPurchase Order Finance may have substantial fees associated with it. You need to build the costs into your quotes to ensure your orders remain profitable.
Suitable for high margin businessPurchase Order Finance may not be suitable financing for low-margin businesses - call Rangewell to ensure a solution is suitable for your sector.
You must work with creditworthy businessesPurchase Order Finance can be available for virtually any business, but it does require your customers to be fully creditworthy.
Frequently asked questions
Have a question?
What documents are required for purchase order financing?
When applying for purchase order financing, you'll need to provide the following information and documentation:
- The customer purchase order
- Your supplier's invoice
- Your invoice to the customer
- Financial statements: profit and loss statements, balance sheets, cash flow statements
- Tax filings
The lender will also look at your businesses reputation and financial standing, along with your suppliers. For example, they will want to know if the supplier can fulfil an order on time. They'll also look at your customer's creditworthiness to ensure they're reliable and will make their payments.
If you're looking to get your business finances in order, get in touch with us today!
What is the difference between an invoice and a purchase order?
The main difference between an invoice and a purchase order is that the purchase order is sent by buyers to vendors to track and control the purchasing process. On the other hand, an invoice is an official payment request sent by vendors to buyers once their order has been fulfilled.
To find out more about invoice finance options, get in touch today.
Can we get a loan against a purchase order?
Yes, you can finance up to 100% of the purchase order costs. Rates will typically fall between 1.8% and 6% per month. Purchase order financing will take 1-2 weeks to fund. If you're looking for a quicker solution, you'll need to consider a short term business loan.
If you're looking to seek additional finance, speak to Rangewell - We'll have a solution to suit your needs.
Do banks fund purchase orders?
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.
To find out more about the cost of invoice finance, speak to Rangewell today. We can provide the finance solutions that work for you!
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