Purchase Order Financing: The Complete Guide [2023]

Purchase Order Financing is a specialized form of short-term financing that helps small to medium-sized businesses fulfill large orders and meet customer demand without straining their working capital.

Discover how purchase order financing can empower your business to fulfill large orders, manage growth, and enhance cash flow. Our comprehensive guide covers the benefits, process, qualifications, and more. Explore the smart choice for emerging businesses!

How Does Purchase Order Financing Work?

Within this setup, a third-party lender, often an asset-based lender, uses purchase orders as collateral to provide capital to the business. This capital is intended to be used for the expenses associated with procuring goods or products from suppliers, in order to fulfill confirmed customer orders. This type of financing is particularly beneficial for emerging businesses that face cash flow constraints or lack the necessary capital to fulfill substantial orders.

Key Benefits

Purchase order financing is a popular choice of emerging consumer goods brands that have collateral to lend against. The key benefits of this type of financing include:

Increased Working Capital: Emerging businesses often struggle with limited working capital, which can hinder their ability to take on larger orders. Purchase Order Financing provides the necessary funds upfront, allowing these brands to fulfill orders without depleting their own cash.

Scalability: One challenge emerging businesses face is managing rapid growth. Purchase order financing empowers these businesses to take advantage of growth opportunities by enabling them to fulfill large orders, thereby expanding their market reach and fueling growth.

No Equity Dilution: Unlike equity financing, where businesses give up ownership in exchange for capital, Purchase Order Financing is debt-based. Emerging businesses can secure the funds they need without diluting their ownership or control over the company.

Fast Access to Cash: PO financing usually offers a faster application and approval process compared to traditional loans, making it a great alternative for brands that need quick access to extra capital.

Overall, purchase order financing is a valuable tool for emerging brands that lack the financial resources to fulfill large orders. It empowers these businesses to seize growth opportunities they otherwise couldn’t, and lets them maintain control over their ownership while meeting market demand. Next, let’s look at some drawbacks.

Drawbacks

There are a few drawbacks that come with purchase order financing. Some of which include:

Limited to Confirmed Orders: PO financing is designed to specifically cover confirmed customer orders. It might not be suitable for businesses looking to finance speculative orders or projects without a confirmed buyer.

Costs & Fees: Purchase order financing costs might be higher than some other types of funding options. These costs often include transaction and interest fees. This isn’t always true, but you should be sure you have a clear understanding of fees before you borrow.

Impact on Profit Margins: This is not unique to PO Financing, but true anytime you borrow money. Costs associated with financing can eat into the profit margins of the business. Depending on the lender’s fees and interest rates, the business might find that the profit from fulfilling the order is diminished.

Perception: Your client or customer pays the PO financing company, not you. This might raise some flags that you’re seeing limited cash flow, but don't worry. This is very common for lots of emerging brands while growing.

How to Qualify for PO Financing

Luckily, the process is simple and straightforward! As long as you meet some or all of the following qualification requirements, you may be well on your way to securing financing!

Confirmed Purchase Orders: Purchase order financing is based on confirmed customer orders. To qualify, a business needs to provide documentation of the purchase orders they have received. These orders should be from reputable and creditworthy customers.

Supplier Relationships: Another important factor to consider is your supplier's reputation. The suppliers involved in fulfilling the purchase orders should be reliable and capable of delivering the required goods or products on time. Financing providers will often assess the supplier's capacity, history, and credibility.

Creditworthiness of Buyers: The creditworthiness of the customers who placed the orders is a crucial factor. Financing providers want assurance that the customers will pay on time, ensuring the repayment of the financing.

Requirements Specific to Assembled Brands:

To qualify for purchase order financing from Assembled Brands, you should also consider the following in addition to the above:

You don't sell services, parts or raw materials - but you do sell finished consumer products and goods

A typical PO would range, on average, at least $250,000

Your average profit margin is at least 20% - this is calculated by looking at the amount you charge for the product compared to your supplier's costs

Your financial statements are on hand and complete

In a nutshell, to increase your likelihood of qualifying for purchase order financing, be prepared to provide comprehensive and accurate documentation, demonstrate your ability to fulfill the orders, and ensure that buyers and suppliers are reputable and reliable. You can learn more about our requirements here.

Is Purchase Order Financing Right for Your Business?

Determining whether or not purchase order financing is right for your business involves a thorough evaluation of the business's financial situation, growth prospects, and specific needs. Here are a few things to consider to make an informed decision:

1. Assess your financial needs: Evaluate your current working capital and cash flow, and identify upcoming orders that require substantial funding to fulfill. Determine if your business has the money to produce and fulfill these orders, or if extra capital is needed.

2. Evaluate growth opportunities: Identify growth opportunities purchase order financing could help you take advantage of that would be otherwise unattainable due to financial constraints.

3. Assess Collateral and Orders: Analyze your historical and projected order volume and frequency, as well as collateral that can be used to lend against.

4. Take a look at your suppliers and customers: Determine if those relationships are strong and reliable, and consider the creditworthiness and payment history of your customers.

5. Explore alternatives: Research alternative funding options, such as traditional loans, ecommerce funding, or factoring. Compare the benefits, costs, and suitability of these options to purchase order financing.

7 Steps to Procuring PO Financing

Once you have determined that purchase order financing is the right financing solution for you, there are a few steps you need to take to receive the money. While the specifics might vary based on the lender and the circumstances, here's a general outline of the steps involved:

1. Collect essential documents, such as purchase orders, supplier quotes, customer agreements, and financial statements.

2. Research and select a reputable purchase order financing lender that specializes in your industry or business size, fill out the application and provide the necessary documentation.

3. The lender reviews your documentation, assesses the creditworthiness of your customers, and evaluates your supplier relationships. If your application is approved, you will be presented with the terms, including financing amount, fees, interest rates, and repayment schedule.

4. The lender might communicate with your suppliers and customers to verify the details of the transaction and ensure accuracy, and confirm the validity of the purchase orders.

5. Once verified, the lender pays your suppliers directly for the goods or products needed to fulfill the purchase orders. With the financing in place, your business can now proceed with production, packaging, and shipment of the ordered goods.

6. After production, the goods are delivered to the customer or the designated recipient. You invoice the customer for the delivered goods. The payment from the customer is directed to a lockbox or account controlled by the lender.

7. Once the customer payment is received, the lender deducts the amount they provided for financing, along with fees and interest. The lender provides you with the remaining balance after deducting the financing costs.

Assembled Brands has made the application process simple, quick and straightforward. We’ve made sure the process is as streamlined as possible, so emerging CPG brands can secure funds and get back to growing their business. All you need to apply is:

The purchase order showing the customer order

Your supplier’s information and their estimate

Your balance sheet

P&L statements

While not always required, you may also need:

Bank statements

Tax returns

Sales forecast for the next year

Connect with Assembled Brands to Grow Your Business!

Scaling your business through tailored financing is a pivotal step in unlocking the full growth potential of your business. As a founder, accessing the right financing solutions tailored to the specific needs of your industry can help you take advantage of growth opportunities that would be otherwise unattainable.

Whether it's purchasing more inventory or upgrading your entire ecommerce setup, Assembled Brands can help! Assembled Brands’s specialized financing options are designed for ecommerce businesses to provide the necessary capital needed to seize growth opportunities.

Assembled Brands is the go-to lender for emerging CPG brands. Discover how your brand can benefit from Assembled Brand’s simple and streamlined process. Apply today!