How Purchase Order Financing Can Help Improve Your Business
Getting a large order from a current or prospective customer can mean big things for your business, but it can also mean big expenses. If you don’t have the capital needed to buy materials and manufacture, purchase order financing can help you gain access to the funds that you require, so that you can fulfill your order.
What Is Purchase Order Financing?
Purchase order financing is a type of short-term loan that is designed specifically to help companies get the money that they need to fulfill orders when they don’t have adequate cash flow to cover costs. With this type of agreement, a creditor extends a loan equal to the amount needed to fill an order and uses the purchase order as collateral for the loan.
How Purchase Order Financing Works
The basic steps for obtaining purchase order financing are:
- You receive the purchase order from a customer that wishes to purchase a product from you.
- You determine how much it will cost you to fill the order, how much you have available to cover the costs and how much you need to borrow to make up the difference.
- You apply for financing and if approved, you sign an agreement and agree to use the purchase order as collateral for the loan.
- You receive the amount of money that you are approved for as a lump sum.
- After the customer has paid you for the filled order, you pay back the entire loan at once plus interest owed and any fees that are assessed by the lender.
Cost of Purchase Order Financing
Each company that offers purchase order financing sets their own fee structure, and in many cases, the exact cost will vary based on a number of factors, such as the amount of the loan and your credit history. The average cost is usually 3 percent for every 30 days that the agreement lasts. In other words, if your financing was for 90 days, the interest would be an average of 9 percent. Interest may accrue daily, monthly or periodically based on the agreement. You may also have to pay an application fee in some cases.
How to Get Purchase Order Financing
In order to obtain purchase order financing, you’ll need to have your purchase order in hand and know the amount that you need to borrow. Then, you’ll need to apply with a lending company that offers purchase order lending programs. Some lenders allow you to apply online or by phone.
Typically, lenders will run a credit check before approving the loan; however, these types of financing agreements usually have more lenient lending criteria than unsecured bank loans. This is because the loans are secured by the purchase order and if you fail to pay, the lender has a method of recourse to recoup the funds. Even if you have been denied for a bank loan in the past, you may still qualify for purchase order financing.
