Outside of factoring receivables, small businesses may be able to use purchase order financing to quickly get the capital they need to sustain or grow their operations. But what is PO financing and how is it different from other alternative financing options such as invoice factoring?
PO Funding Is a Situational-based Funding Option
Unlike invoice factoring, which can be used in a number of circumstances, PO funding is a purely situational financing option. When a manufacturing, distribution or wholesale business gets an unusually large order but lacks the capital to satisfy it, purchase order funding can help. For this reason, it is almost exclusively used for those businesses in manufacturing and the production of finished and unfinished goods. (Businesses that provide services generally do not qualify for this type of funding.)
Because of the specificity and single-purpose use of this financing option, it lacks the flexibility of other options such as factoring. It is, however, commonly used by many new and early stages businesses, seasonal businesses or those going through periods of tremendous growth.
Find PO Financing at Invoice Factories Companies
Many invoice factoring companies, including Riviera Finance, Business Factors, J&D Financial, Universal Funding, Paragon Financial, and CIT offer PO financing in addition to factoring services. Similar to factoring, PO financing provides businesses with capital in a very short period of time, 2-3 days. Speed is the quintessential component to both financing options.
Also similar to invoice factoring, PO financing relies on the creditworthiness of the client rather than the business itself. Except this time, the dollar amount being financed is not based on the invoice but on the purchase order. These two financing options fall into the same small business finance family, which is why many established account receivables financing companies offer it as one of its options. Very few firms only offer financing that is based on purchase orders.
Again, PO funding is used for a specific purpose, such as when a business needs to:
- Dramatically increase production due to seasonal or holiday demand
- Shore up capital to move through a rapid expansion phase
- Bump up cash flow quickly in order to sustain business operations
- Obtain cash quickly to process a high profit margin sale it might have to otherwise reject
An explosive growth in sales can be the aspirations of many small firms. Yet what these business owners might not know is that without sufficient working capital to support sales growth, a company can actually buckle under its own weight. Many businesses are unprepared for the problems that could occur when sales exceed cash flow.
Satisfy Sales Demand with Fast Cash from Purchase Orders
Growing sales is generally viewed as a good thing, albeit the best thing that can happen to a burgeoning business. Yet without proper capital to shoulder rapid growth, businesses can find themselves unable to execute the sale. If this occurs your business can suffer a major setback and be viewed poorly for not being able to execute its sales. Customers can lose trust in your business, become dissatisfied and choose your competitors. Though invoice factoring companies charge higher rates for PO funding, it is better than the alternative, which is losing sales and customers.
Though account receivables financing companies all have different requirements for PO funding, it’s required that the manufacturing company’s client is a large corporate entity with a long-established credit history. So a profitable big-box retailer would be an example of an ideal candidate yet a small boutique storefront that has only been established for three years would not.
Not all Factoring Companies Offer PO Funding
Usually only very established account receivables financing companies such as Riviera Finance, Business Factors, J&D Financial, Universal Funding, Paragon Financial, and CIT offer PO funding. This is because it can be a complicated, multifaceted endeavor on the backend and because it necessitates vast capital reserves.
It also requires significant expertise in the industry to support the fast-moving, high-volume transactions associated with this type of funding; it is not a job suitable for the wet-behind-the-ears factor.
Most invoice factoring companies do require a sizable minimum for PO transactions. They also might require the sale to produce gross profit margins of at least 30 percent though higher is recommended. It is a more expensive funding option and for this reason, it might only be worth it if the transaction yields high returns.
Most businesses use purchase order financing on an as-needed basis, maybe once or twice a year, to cover a must-have sale. Invoice factoring, on the other hand, is generally used on a monthly basis for a period of six months or more.
So now you know the difference and the common uses between these two popular commercial financing options. Though PO funding is offered by some account receivables financing companies and they both involve fast financing, it differs from factoring in many ways such as specificity of use, cost, industry requirements and more.