A common struggle faced by small businesses who sell products is having sufficient cash or inventory to deliver on a purchase order. Many up-and-coming businesses receive large purchase orders that would change their organisations forever but have declined due to a lack of resources or capital to fill the order. Passing up on these opportunities should never be an option, and that is where purchase order funding can lend a helping hand.
While many may think the natural progression of events would be to approach a bank for lending, this is not usually the case for small businesses. This sad reality is largely due to banks being wary of lending to them due to the perceived high risk, mostly due to a lack of trading history or an abundance of financial data.
Purchase order (PO) funding seeks to fill the gap caused by this disproportioned access to funding, enabling small-to-medium-sized businesses to deliver on life-changing opportunities.
What is PO funding?
Purchase order financing is a very specific cash-advanced funding solution for small businesses that cannot pay suppliers to provide the goods to deliver on customers’ orders. In this case, a third-party lender, like Sourcefin, is approached.
With a successful application, the PO funders pay the suppliers directly for the goods required and, only upon payment, will the PO funder receive their original amount advanced as well as some share of the deal profit. In this way, Sourcefin truly partners with the small business and shares in the success of the delivered order.
How to apply for PO financing?
Unlike other lending relationships, the PO funder will require information related specifically to the order. Remember, the value of the purchase order secures the potential loan, so it is important to the funder to verify that value exists in order to firstly secure their investment, and secondly with sufficient margin or profit available for a return that meets risk while ensuring their client also profits from the deal.
To this end, the funder will also need your purchase order and will consider factors such as the products being delivered, your relationship with and reputation of supplier and customer, your previous record of selling the product, and most importantly, your customers and their ability to pay timeously. The legitimacy and credit standing of your customers takes precedence in PO funding as the customer is the one who will repay the PO funder.
How does PO funding work?
Steps in PO funding
- Your customer submits a purchase order specifying the type and volume of goods they want. This information allows you to determine your ability to deliver on the order by checking inventory and conferring with your supplier. If you are unable to due to funding constraints or due to a limited supplier network, you may consider enlisting the services of a reputable PO funding company, like Sourcefin.
- You make an application to the PO funding company. Once approved, the funder will, in most cases, approve you for up to 100% of your supplier costs
- The PO funding company then pays your supplier, who will then ship the goods directly to your customer.
- Once the product is delivered, the supplier will inform you, and you can proceed to invoice your customer.
- The customer then pays the invoice, from which the first payments to be made using this cash inflow would be to the purchase order funder, firstly to repay the amount paid out by them and secondly the interest charged.
- Once the PO funding company receives their payment, the remaining amount received is yours and you can consider the purchase order successfully delivered.
Purchase order funding has become a welcomed playing field leveller and source of relief for small businesses that want to satiate customers’ needs while exceeding expectations. Whereas small businesses would previously turn away customers if they couldn’t fulfil orders, with the quick and easy support of PO funding, this is a thing of the past and small businesses can look forward to scaling.
