Many small businesses find themselves cursed with success. Large orders start to come in from customers, and the company’s cash flow is not enough to cover the cost of fulfilling those orders, even though the end result would be extremely profitable. In these cases, many business owners turn to purchase order financing. Here is what you need to qualify for purchase order financing.
How to Qualify for Purchase Order Financing
Purchase Order (PO) lenders look at three major factors before approving a business for PO financing: the size of the order, the amount of profit being made on large-volume orders, and the financial health of the end customer making the order. Typically, if your business sells to other businesses on credit terms, you can qualify for PO financing. Let’s look at some of the details of what PO lenders evaluate for determining PO finance approvals.
3 Main Criteria for Purchase Order Financing Qualification:
- Size of the order
- Profit you make on large-volume orders
- Financial health of your customer
1. Order Volume
Purchase Order lenders want to see how large the orders are that the business is receiving, and why it is putting a strain on their cash flow. This gives the lender an idea of how much money they will have to set aside to cover the order, and if PO financing would be beneficial to all parties involved. For example, a manufacturing company that is experiencing a jump in regular sales of 10 units a month to 15 units probably isn’t going to need a Purchase Order loan. However, if that company receives an order for 500 units from a single customer, then PO financing would definitely look like a viable solution. Typically, businesses with demand for large orders will work best with PO financing, even if the majority of your orders are not large.
Most Purchase Order lenders look for a company that sells things at a markup of at least 30%. This is a healthy profit margin that allows PO funding to accelerate your business growth without eating into the cost of fulfilling the order. At less than a 30% profit, a PO loan can actually do more harm than good to a company’s cash flow, because the business would be risking fulfilling orders at less than cost. It is worth a look at your profit margins when you are considering PO financing. If you are unsure, a PO lender can offer further insight specific to your business.
3. End Customer Finances
Purchase Order lenders also need to see the financial health and credit rating of the customer that placed the order. A solid credit rating, and healthy track record of paying bills in a timely manner go a long way in getting a PO loan approved. First, the PO lender gives your business the money you need to fill the order. Then, the lender delivers the final bill to your customer. After the customer pays, the PO lender deducts the advanced funds and a small PO fee, and then gives the remainder to your business. If you meet the 3 main qualifying criteria, this form of funding will help you grow.
Does Your Business Need Better Cash Flow? Will PO Financing Help Your Business Grow?
If your company is experiencing a sudden growth, you will face cash flow issues. It’s a great sign when customers are placing larger orders. Still, this can be more than your current cash flow can handle. A Purchase Order loan can help. It might be just the thing to ease your business into the next stage of success. PO financing is growth enabling by giving your business the ability to accept more and larger orders. You can grow without the burden of upfront costs for fulfilling those orders.