If you run a wholesale business, you’ve likely found that supplier payment schedules can be a major hassle. Businesses that generate orders at a faster pace than available capital often run into cash flow issues that can be tough to overcome. This challenge becomes especially problematic if your company has little to no equity. If your company is generating orders faster than available capital, you may be eligible for purchase order (PO) financing. PO financing is a short-term funding tool that can help your business avoid all the funding shortfalls associated with payment schedules.
Purchase Order (PO) Financing: What It Is and How It Works
PO financing injects cash into a business, enabling it to fill single or multiple custom orders quickly and without hassle. Businesses rely on PO financing when they simply don’t have enough money to cover the costs of doing business. This option serves as a stop-gap to ensure businesses have the money they need to keep the business running.
As a business owner, having to turn down a client because you can’t fulfill their order means a loss of revenue. In a highly competitive market, that revenue might be lost permanently as clients seek out more reliable service providers. This is a mistake many small businesses simply cannot afford to make.
In PO financing, a payment company pays your supplier so that you can fulfill customer orders. The payment to your supplier is basically an advance that allows the supplier to fulfill your order. In some cases, PO financing covers 100% of the amount of the supplies.
Under this arrangement, the supplier is paid directly on your behalf by the financing company. Once they are paid, your supplier manufactures and delivers your product. The transaction is settled once your customer receives the product and pays for it.
The payment company providing the financing collects their fee at the end of the transaction. It does so by collecting the invoice from your customer and deducting a portion of it to cover its fees and expenses. These fees are spelled out at the outset.
Another method for securing PO financing is by opening up a direct line of credit with the supplier. This method is beneficial for businesses with little or bad credit.
Combining PO Financing With Factoring
When combined with invoice factoring, PO financing offers significant cost savings. That’s because the cost for factoring is typically lower than the cost of PO financing. Options such as accounts receivable factoring (A/R) provide your business with working capital financing based on the value of your receivables.
Factoring solutions usually kick in once your client actually pays for the product. Factoring is then used to pay off your PO financing costs.
In other words, PO financing pays your supplier and A/R factoring then finances accounts receivable to pay the PO financing debt.
Regardless of the option you choose, purchase order financing gives you the necessary capital to keep its operation running smoothly. So the next time you receive an order for 10,000 units of your product, you can rest easy knowing you can actually pay your supplier to make it.
Advantages of PO Financing
As you’ve no doubt noticed by noticed by now, purchase order financing can be very advantageous. Some of the main benefit include:
- Available financing for new companies and startups: Unlike other financing programs, strong credit history isn’t needed to qualify for PO funding. If you’re a startup, consider a PO funding program if investors turn you down.
- Easier than other loan programs: PO financing is easier to qualify for and implement when compared to other loan programs.
- Enables growth without limitation: Businesses looking to scale up are the best candidates for PO funding. That’s because you can borrow indefinitely based on the size and quality of your future orders.
- Transactional: Since the transaction is settled only when the client pays for your product, PO financing is used only when you need it.
- Full reporting transparency: PO financing gives you complete insight into the status of our orders, including the status of your invoice and supporting documents.
- Funding is based on the quality of your POs: If you’re generating great clients, your PO funding solution will reflect that. This solution leverages the future value of your purchase orders, allowing you to focus on landing great clients.
- Easy to set up: The market for PO financing is highly competitive right now. A PO program can be set up quickly and efficiently, ensuring your business doesn’t miss the next order.
The Red Door Advantage
Red Door Capital takes the worry out of purchase order financing by working with third-party manufacturers to produce your product. This allows your company to concentrate on sales, not capital. We help remove the administrative burden from your day-to-day capital needs so that you can focus on growing the business.
To qualify for purchase order capital, we’ll work with you to get an updated aging report, interim financials and purchase orders from suppliers. We’ll then go to work on your behalf to set your business up with custom purchase order financing.
We work with PO financing companies that provide complete transparency, quality assurance and best-in-class services. Best of all, they will leverage the value of your future POs, allowing your business to unlock credit.
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