If you’re a business owner, chances are you’ve had some teething problems while on your growth trajectory. Whether that’s a lack of funding or cash flow problems – it can be frustrating and stressful trying to secure funding and keep cash freely flowing.
Luckily, for those battling with cash flow, help is at hand. If you’re a business struggling to stump up the cash to complete an order, consider purchase order financing.
Purchase order financing (or PO financing) is a term often floated around by businesses. But what does it mean?
Essentially, PO financing is a funding solution for businesses that lack cash flow. As the name suggests, it’s a type of finance that can be secured when you receive a purchase order.
How purchase order financing works is relatively simple. If you receive an order that you lack the funds or cash flow to complete, the financing company will pay your supply chain for you so you can fulfil your contractual obligations to customers.
Your customer will then pay the purchase order finance lender, which will take a cut and send you on your way with the remaining cash.
Purchase order financing is typically for small businesses that need a quick release of cash to fulfil orders and pay suppliers.
There are many reasons why you may struggle with cash flow. Maybe your rent has eaten into your profits? Perhaps you’ve used up your cash reserves? Or maybe you’ve had problems with invoicing and customers paying on time?
No matter the reason for cash flow problems – PO financing is a quick and effective way to complete purchase orders and keep your customers happy.
If you’re a business that has to buy supplies to fulfil a customer order, you may be eligible for purchase order financing.
Purchase order financing is generally available to the following businesses:
In reality, lots of businesses are eligible to use purchase order financing. However, there is one caveat: if you sell services or materials then you won’t be eligible for PO financing in the UK.
However, if you sell a completed product, you’re good to go.
Although in an ideal world you’d have enough cash to fulfil an order, it doesn’t always work out that way (especially for small businesses!).
Yet not having cash flow is not necessarily a terrible thing or an indicator that your business is doing badly. In fact, the opposite may be true. If you’re growing faster than the money is coming in, you may run into cash flow problems.
Your business may also be seasonal. For example, if you tend to experience a lull in the summer months but a boom in winter, PO financing is a great way to bridge the gap when cash flow is tight.
The same goes for cyclical businesses that tend to experience a drop if the economy drops - much like car manufacturers.
If you’re considering purchase order financing, there are a few different steps to follow.
A seemingly obvious step, but you cannot use purchase order financing without a purchase order. The customer will need to specify the type and volume of goods they wish to purchase.
You can then decide whether you need to consider alternative financing methods.
Once you know the volume and type of goods your customer wants to order, you can ask your supplier for an estimate. That way you’ll know whether you can afford to fulfil the order. If you can’t, you’ll need another way to pay for it.
If you can’t afford to fulfil the order, you can apply for PO financing. Following your application, your purchase order financing lender will approve your business for either the full amount of supplier costs or a portion of it.
How likely you are to be approved and for how much depends on:
Once the supplier has been paid by the PO financing company, your supplier will deliver the goods directly to the customer. You won’t act as a middleman.
Once your customer has received the goods, they should notify you. You can then invoice the customer for their order.
Rather than paying you directly, your customer will pay their invoice to the PO financing company. As soon as they have paid, you will be entitled to your cut of the profits.
After deducting their fees, the purchase order financing company will pay you the remaining cash left from the invoice.
And that’s it.
Although not suitable for all businesses, PO financing can be a lifeline when it comes to fulfilling larger orders for companies facing cash flow problems. Some of the benefits are:
Although PO financing can be great for many businesses, it isn’t without its downfalls. Some potential disadvantages are:
Unlike typical loans, there are far fewer hoops to jump through for businesses. To qualify for PO financing all you need to do is:
If you’re going down this route, you’ll also want to find the best purchase order financing company you can. It’s not always best to go for the cheapest.
Depending on your business, you may not be suited to PO financing. If this is the case, there are plenty more options you can consider.
If you’re wondering whether PO financing is right for you, contact our team today. They’re always on hand to talk through your situation and recommend the best options for your business.
5 August, 2022