Using Purchase Order Finance for Your Start-up Business

When you need additional funding for your new business, you should really consider purchase order finance over other finance alternatives.

Most of the time, you fund your startup with your own seed money. You probably have what you think is a great idea for a product, and now you want to make those products to sell. To do that, you use all your savings, and maybe even get a mortgage on your home so you can have startup money. Perhaps you even borrow from your friends and close family members who believe in you and your idea.

Potential Financing Problems

The problem with these sources of financing is that they don’t have enough to really fuel your growth. You need lots of working capital, and usually you have to start making your gizmos even before you get your purchasing orders. And getting additional financing can be a problem when you deal with traditional lenders.

In general, banks are hesitant to lend money to startups, because they aren’t all that enamored of the risks involved. Banks see small businesses as too risky, and new small businesses are even more fraught with uncertainty. The failure rate is so high that most banks just don’t bother funding small business startups.

And venture capitalists aren’t any better either. While the news media are full of sensationalized stories about new tech startups getting astronomical sums of money for funding from venture capitalists, the reality is that only a small percentage of new businesses get funding this way.

And there’s another disadvantage, in that with venture capitalists you have to give up a share of your company, which means you give up a share of your future profits.

Using Purchase Order Finance

So let’s say you’ve managed to convince a retailer to buy your products in bulk. They think that your gizmo is terrific, it can appeal to lots of people, and it’s profitable for them. So they place a large order, and that means you’ll need lots of working capital to meet that order.

That working capital will be needed to pay the manufacturing plant you commissioned to do a production run of your product. And they won’t do that unless you pay them upfront. After all, you’re a startup. It’s just too risky for them.

This is the stage where most startups have difficulty moving forward. It’s actually a very common situation, where a startup has a large order and no cash to meet it.

And that’s where purchase order finance comes in. They use the purchase order value as the basis for the cash advance. They take care of the manufacturing cost, and then when you fulfill the order and the customer pays, the lender gets back its advance plus the fee for the financing.


The lender will have some requirements which you need to comply. Usually the lender will have some say as to which manufacturing plant will produce your gizmo. Then you have to demonstrate that you will earn a huge gross margin, at least 30%.

Finally, it’s a good idea to start negotiating for purchase order financing even before you finally get your P.O. The purchase order usually has a deadline (60 to 90 days), so you should have your financing lined up before the order arrives.

When is Purchase Order Factoring Right For You?

For many growing businesses, financing is a problem that comes up sooner or later. It’s also a very pressing concern when the financing is absolutely required for the company to survive. But many companies are finding out that purchase order factoring may be a viable solution for their problems.

In purchase order factoring, your company gets the funding it needs not through a standard bank loan but through a process that uses a purchase order as collateral.

So is this financing option right for you? Here are some factors you need to consider:

  1. You’re a government contractor, distributor, wholesaler, or reseller of manufactured products. This is a very common requirement, although some finance companies will accommodate businesses that manufacture products themselves, while others may finance service providers.
  2. You don’t have good credit and you are experiencing cash flow difficulties. The cash flow issue is why you need a loan, and the lack of good credit is preventing you from securing a bank loan in the first place. That’s why you need purchase order factoring, because with this option your credit is not important.
  3. You received a large purchase order that you don’t have the resources to fulfill. This can lead you to reject the purchase order, which is not exactly a good thing as far as your reputation and profit margin are concerned. But with purchase order factoring, you can get the necessary resources to take the order and complete it on time.
  4. Your purchase order comes from a creditworthy company, such as a large firm with a stellar reputation for paying promptly. While your credit isn’t very important to the factoring company, the credit of your customer is absolutely crucial. If they have bad credit, the financing may not be approved.
  5. You may have suppliers who demand that you pay upfront. This is what’s causing the cash flow problems in the first place, and this is the problem that the factor addresses right at the start. Your suppliers get paid upfront or receive a guarantee or a letter of credit from the finance company.

Financing companies differ as to how much of the supplier expenses they will cover. Some factors may cover only part of the cost that your current cash flow cannot cover, while other factoring companies may cover the entire supply expenses.

  1. You get a significant gross margin. While again, the standards here are different depending on the financing company you talk to, it’s very typical for them to require that you at least get a gross profit of 20%. If it is too small, then using the purchasing order may be futile because the financing company may take a large chunk of the profit instead.

While there are several options for businesses to secure financing, with purchase order factoring you can get the help you need right at the beginning. This kind of financing is much easier and faster to secure, and it’s a godsend if you have bad credit, little or no collateral, and a large purchase order from a reputable customer.


How to Find the Best 2015 Purchase Order Finance Company

The lack of sufficient working capital can greatly affect any small business. If a contingency occurs, then the lack of working capital can prevent a business from fulfilling their usual services. And even if working capital is sufficient for the current level of business then new opportunities for growth may not come to pass because the working capital is not enough to fulfill bigger orders.

What is Purchase Order Finance?

With purchase order finance, these disasters can be prevented. Essentially, this is a type of loan which is contingent upon the purchase order. The lender checks that the purchase order is authentic and the customer is qualified for the transaction. Then the lender assesses the suppliers to see if they can deliver the supplies to your company. Of course, the lender also evaluates your own company’s ability to fulfill the terms of the purchase order.

Then the lender issues a letter of credit to your suppliers. Your suppliers then get paid when they’ve delivered the goods according to the terms of the agreement.

The lender gets paid when your customer gets the goods. Since usually you issue an invoice, you may have to get the assistance of a factor that advances about 80% of the value of the invoice to you. The purchase order lender then gets paid for the advance when you get paid.

Choosing the Right Purchase Order Financing

Basically, what you need is a purchase order lender who can work with you, your customer, and your suppliers. But this can get very tricky sometimes. For example, you may have suppliers which are based in a foreign country. If your lender has no experience with these suppliers, then issuing a letter of credit can be problematic.

You also need to be able to comply with the specific requirements of the purchase order lenders. Some lenders require you to prove that you have at least 30% profit margin. But others only require a 20% profit margin.

You’ll also need to check their funding levels. Some can offer millions of dollars for purchase order finance. Others may have minimum finding levels which may be much more than what you need.

The lender’s fees and interest rates must also be noted. Some lenders are more reasonable than others, while others charge high fees because of the inherent risks to purchase order finance. Your customer may cancel an order, or your supplier may be unable to deliver an order within the terms of the purchase order.

Finally, choose a lender who can give you what you need fast. There is a window of opportunity here which limits the time you have. Your lender must be able to quickly evaluate the situation to see if they will provide for the financing or not. Taking too much time may lead the customer to cancel the order and go with another company.

All these considerations must be reviewed carefully before picking a purchase order finance company to work with.


How to Get PO Finance in 24 Hours

Managing your own small business can be a very challenging endeavor. At the start you may worry about how to get your business running, and it can take all of your expertise and effort to succeed or even to stay afloat. And then when you suddenly find yourself in a position to grow, you find that circumstances can force you to hold back. But with PO finance in 24 hours, you can still forge ahead and claim the success you’re meant to have.

What is PO Finance?

Let’s say that you have an order to fulfill for a new customer. You’re tasked to deliver 10,000 gadgets to your customer within a given amount of time, and you’ll be paid $100,000 for the entire order if you deliver. You have the contacts and the knowhow to get those 100,000 gadgets delivered on time, and the total expenses will only cost you $60,000.

That means you can get $40,000 in profit. But there’s a big problem. You don’t have $60,000 to begin with.

And that’s where purchase order finance comes in. The finance company opens a line of credit so that the suppliers are paid, and it also usually takes care of the collection of the payment from the customer. Once the customer pays in full, the finance company takes back what it used to pay for the supplies plus a fee for its services, and you get the rest of the profit.

Advantages of PO Finance

The main advantage of PO finance is that you can get the funding much more quickly than if you applied for a loan. In some cases, you can get approval for PO finance in 24 hours. That’s a huge difference from the many weeks you need to get a bank loan.

The reason for the speed difference in the two funding methods is that with a bank loan the bank needs to make sure of your company’s financial ability to pay back the loan. That means lots of paperwork that proves the financial health of your business. In addition, banks also need collateral for their loans as well.

In PO finance, all the finance company needs to know about your company is its ability to fulfill the purchase order. The finance company doesn’t need to know the quality of your credit. Instead, the credit history and the propensity of your customer to pay fully and on time are investigated. All these factors determine the size of the funding.

So if you have a fairly stable and reputable customer, then you can get approval of the funding in 24 hours. Setting up your line of credit is very quick, and a schedule is also drawn up so that the finance company can be assured that you’ll be able to deliver on time.

Because you can now avail of PO finance in 24 hours, you no longer have to turn down purchase orders even if you don’t have enough working capital. You can grow your business if demand for your products increase, and at the same time you can also establish a reputation for meeting orders on time.

Purchase Order Financing for Medical Companies

With purchase order financing, the PO serves as a guarantor that the advanced loan will be paid. What’s important here is not the credit worthiness of your medical company.
With purchase order financing, the PO serves as a guarantor that the advanced loan will be paid. What’s important here is not the credit worthiness of your medical company.

There are about 6,500 medical device companies in the US, and surprisingly most of them are small and medium-sized businesses. Majority of these medical companies have less than 50 employees. Also, many of them have little or no sales revenue yet. This is especially true for start-up companies, which make financing almost impossible. But that’s where purchase order financing for medical companies can help.

The Need for Financing for Medical Companies

The world medical device market is huge, but the US market remains the largest. It has a market size of $110 billion, and it’s projected to increase to $133 billion by 2016. The US has a net trade surplus with exports exceeding $44 billion in 2012. It also directly employs 400,000 Americans directly and about 2 million workers, indirectly.

But the entire industry is in trouble, due to the health care crisis and subsequent public policies. That includes a rather harsh 2.3% excise tax. It requires the payment of an additional $1 billion from the medical device industry. What’s harder to accept is that the tax is based on gross sales.

Imagine that you have gross sales of $1 million and your profit is only $100,000. Since the tax is based on the gross sales, that means you need to pay the government $23,000. You lose almost a quarter of your profits on tax!

Purchase Order Financing

With purchase order financing, the PO serves as a guarantor that the advanced loan will be paid. What’s important here is not the credit worthiness of your medical company. All you need to demonstrate is that you can fulfill the order. What’s more important is that the customer who made the purchase order can be trusted to pay the bill once the order has been delivered.

The lender can advance as much as 50% of the value of the purchase order, but some lenders may offer more. The typical financing rates average at about 3% per month (30 days). The rates are applied on the funds used—the lender pays the suppliers of the medical device company directly.

Benefits of PO Financing

In the medical industry, supplies and equipment form an integral part of adequate health care. Knowledge is well and good, but to help patients you also need supplies such as gloves, as well as expensive equipment like MRIs and CAT scans. There will always be a high demand for such modern devices.

As you can see, the main benefit of purchase order financing for medical companies is that you get the money you need to complete a purchase order. You don’t have to refuse a client simply because you don’t have the money to buy your raw materials and supplies. Refusing such orders can be costly for your business and it can mar the reputation of your company. You can also miss out on future purchase orders after you’ve met this first order. Financing a medical company these days may be difficult, but options like PO financing are always available.


What is Manufacturer Purchase Order Finance?

US manufacturers constantly need working capital. They go to banks and ask for a loan or a line of credit, but often such efforts can be frustrating and futile. Even factoring, in which invoices are leveraged for funding, may not work when there are too few invoices. But manufacturer purchase order finance may just be the solution.

The Problem with the Manufacturing Industry

Manufacturing today, especially in the US, is still in the doldrums. The industry employment rate fell by 10% because of the recession, and its current employment is just half of what it was in 1979. While there are signs of new life brought about by exciting new technologies such as 3D printing, these advances just add to the additional expenditures. US manufacturers today are still using equipment that’s slowly becoming old and obsolete.

For manufacturers, the question of expenditures is crucial. There is payroll to meet, along with other operation expenses. The problem is compounded by the fact that their clients pay in 30 or 60 days. Often this means that a manufacturer may have trouble maintaining an adequate cash reserve for the purchase of supplies when a new project or purchase order comes in. It may even cause a manufacturer to refuse a purchase order that can bring in much needed revenue.

And that’s where manufacturer purchase order finance comes in.

How Purchase Order Finance Works

In this scenario, the manufacturer can take a new order even if they don’t have the money to pay for the supplies needed to complete it.

Once the finance company approves of your request for purchase order financing, they may reserve a percentage of the value of the order (such as 50 to 70%) for your working capital use. Your finance company may pay the suppliers themselves, or they may open a line of credit for you to use. Once your customer pays lender the amount they owe in full after you have delivered the order, you then get the rest of the payment owed to you, after the finance company has deducted its fees.


The manufacturer may not need to have the best credit ratings and there’s no need for collateral, but the finance company will need to evaluate a few things first. The finance company will make sure that:

  1. You have enough of a profit margin on the order to make the financing worthwhile. Some finance companies, for example, will want to see at least 20% gross profit margins, while 30% is preferable.
  2. Your company has the ability to complete the order, according to the contract. You have to make enough products in the quality required by your client, according to the schedule specified. You need to have strong financials and you should have enough experience in the type of product requested. If you don’t have the experience, you may consider getting a sub-contractor to manufacture the product.
  3. Your customer has an excellent reputation. They should have a good history of paying on time, and the purchase order cannot be canceled.

With this type of funding, you can now accept more orders instead of turning them down.

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Fulfill Christmas Purchase Order with Adequate Working Capital

Christmas season is a busy time for retail stores and wholesale companies, and it can get very stressful. People are in the mood to buy, and businesses must make sure that they can accommodate the demand sufficiently. Christmas sales can increase the annual revenues tremendously, but the ability to fulfill Christmas purchase order properly is not always a sure thing.

Potential Difficulties in Fulfilling Large Purchase Orders

In some ways, a large purchase order is a dilemma. It is both a risk and an opportunity. It’s an opportunity to earn more money for the year, yet at the same time the inability to fulfill a large purchase order can easily damage the reputation of your business.

The many problems associated with large purchase orders include:

  • Arranging for suppliers to meet the volume required in the order
  • Hiring more personnel to do extra work
  • Making sure that distribution channels function smoothly
  • Being able to pay for every operational expense

Essentially, you need a healthy amount of working capital to make sure that you are prepared for every eventuality.

The Problem with Traditional Bank Loans

If you’re like most small business owners, your first thought would probably be to secure some form of working capital financing from your bank. But this is not always your best option. Among the most significant drawbacks of applying for a loan is that banks take a very long time to process loan applications. After all, they have lots of clients to help, and they have to investigate your business thoroughly before they lend you the money you can use for your operational expenses.

And even after all the time you spent on applying, the chances of actually getting a loan aren’t exactly good. For loans amounting to less than $100,000 banks offer a paltry 46% approval rate. To qualify for a loan, your credit must be spectacular and your collateral should be noteworthy. And you may not always get the amount of money you need—you can ask for $200,000 in loans and the bank may offer you $40,000 instead.

Common Alternatives to Traditional Bank Loans

So what can you try instead? Today, two of the more popular options include invoice factoring and purchase order financing.

For example, you may actually have the working capital in theory, except that your previous retailers have not yet seen it fit to pay you for the supplies you have delivered them. Your suppliers may ask you to pay them in 10 days, but some retailers may pay you in full in 90 days. That means your money is tied up in those invoices.

With invoice factoring, you get your money immediately. The factor advances you the money (anywhere from 70% to 90% of the value of the invoice) so that you can use that money to buy supplies for your holiday purchase orders. The rest of the money (minus the factor’s fees) will be turned over to you once the retailer has finally paid in full.

You can also fulfill Christmas purchase order by using that purchase order to obtain financing. A finance company may also advance you a percentage of the value of the purchase order so that you can have the money you need for your supplies. With these sources of funding, you can make sure that it’s going to be a Merry Christmas for everyone.


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The Benefits of Large Holiday Purchase Order Finance

Some businesses make fairly steady sales throughout the year. Other businesses, however, may get more orders during certain times of the year. If you belong to this kind of industry, then it means that your working capital needs are filled with peaks and valleys. Sometimes you don’t need much, but during the holidays your cash reserves may be stretched beyond what it can adequately cover. But with the help of large holiday purchase order finance companies, you can still cover all your purchase orders anyway.The Benefits of Large Holiday Purchase Order Finance

How Holiday Purchase Order Financing Works

Without purchase order financial assistance from a finance company, large volume purchase orders are virtually impossible for you to fulfill. After all, your cash reserves may not be enough. Without help, you’ll need to have to reject some of the purchase orders, and that means you’re cutting your business off from excellent opportunities to make large amounts of profit.

With a large purchase order, your finance provider can give you the money you need in order to pay for supplies and other expenses and meet payroll for your employees. You can get as much as half or even 75% of the value of the purchase order.

Benefits of Purchase Order Financing

If you know that your company makes a lot of money during the holidays, then it’s your responsibility to consolidate your cash reserves to meet the expected increase in orders. There may be several reasons why you have failed to do so. Perhaps there was an emergency expense or opportunity earlier, or maybe the increase in orders was greater than you anticipated.

Regardless of the reason, you have to face the reality of your situation. And that’s why you need to consider purchase order financing for this emergency. There are several benefits you can get:

  • You only get the money when you’re sure there is a need for it. The money you get depends on the size and number of the purchase orders you receive during this holiday season.
  • The application process for this type of funding is easier to get, and the setup is much faster to arrange. With bank loans, the application process is terribly time-consuming. What’s more, you’re not even sure of getting the loan in the first place because banks are more reluctant to lend money to many small businesses.
  • With this form of assistance, you can get working capital for every type of large order you get. The lack of money won’t be a hindrance. Only your hard work and your abilities will determine if you can fulfill an order or not. This way, you have an excellent chance of making up for all the lean days during the rest of the year.

With some companies, a large purchase order essentially means a lost opportunity because of their inability to come up with the cash to buy materials and pay for manpower. But with large holiday purchase order finance, each large purchase order means another opportunity for your company to make a lot of profit.

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The Necessity of Purchase Order Financing for Construction Companies

If you run a construction company, it’s not easy to explain just how much you need to spend in order to make a profit. You need to pay your workers, you have to buy lots of supplies and machines, and you have to have enough money to pay for the rent of special equipment. All of these expenses can add up to an unbelievably large amount of money. But if the offered contract is large enough, then you may be able to get some purchase order financing for construction companies.

How Purchase Order Financing Works

With purchase order financing, the finance company will first confirm the authenticity of the purchase order. Then of course they will also investigate the reputation of the client company making the purchase order.

After that, you need to identify your expenses. You need to list down all your expenses which have to be dealt with in order for you to fulfill the contract. You also need to demonstrate that you can make a healthy profit out of the deal. Most finance providers won’t bother if you don’t make a good profit out of the contract in the first place.

If you can meet all the requirements, then you may be able to qualify for purchase order financing. You may get as much as half (or even three-fourths) of the value of the purchase order right away. Your finance company can then pay off your suppliers for you.

Once you get your money, you can then pay for payroll, equipment rental, and supplies. You can fulfill the contract and then get your profit. Often, the client won’t pay right away but will wait for 30 to 90 days as well.

Advantages of Purchase Order Financing

So why choose this route instead of a traditional bank loan? Here are some compelling reasons:

  • Applying for a bank loan takes a very long time to complete, and the chances of getting the money you need is fifty-fifty at best. With purchase order financing, the chances of getting the funding are much better.
  • Purchase order financing is a bit like working with partners, except that in this case you don’t need to sell of a slice of your company just to get the working capital you need.
  • By being able to accept a purchase order that may have seemed impossible at first, you build your reputation with your client and that makes you much more successful in the future. You can get a lot more contracts because of your success in fulfilling just this one contract.


Without the necessary cash reserves, you may not be able to fulfill a business contract. But with purchase order financing for construction, you may be able to get the money you need to meet the terms of the contract and ensure that you maintain a good reputation with your client. By fulfilling the contract, you’re more likely to get more projects from that company in the future.


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How International Purchase Order Financing Works

If you are into the wholesale distribution business, then explaining your work to a “layman” should easy enough. You act as a middleman between the manufacturers of goods and the retailers selling these goods in their various shops. The retailers ask for certain goods in the amount they want, and your job is to meet these orders and arrange for everything on schedule. But sometimes, you may need international purchase order financing to make it all work.

International Purchase Order Financing

The Potential Problems with International Distribution

When everything lines up properly with this arrangement, everything goes smoothly. You fill an order, arrange for the goods from overseas suppliers, and everyone’s happy. The problem, however, is if the retailers ask for an order that’s too large for you to cover. You may not have enough working capital with you to buy the supplies you need.

This usually has two possible endings: either you take the order and fail, or you have to turn down the order. Either way, you end up with a retailer who’s not too happy with your performance, and you lose not just the profits from that order but the profits from all their future orders. The retailer, after all, would stick with a wholesaler who can provide what they ask for on a regular basis.

And sometimes there can also be problems paying foreign suppliers. It’s not just the problem with foreign currency, but there are also some potential problems with foreign laws and regulations. These foreign rules can be very complex, and you can end up unknowingly violating some clause or rule.

Solving Problems with Purchase Order Funding

But just because you don’t have enough money to pay for supplies doesn’t mean that you automatically have to refuse a large order. In fact, the purchase order is exactly what you need in order to get the financing you need. This is called purchase order financing.

With this option, the funder regards the purchase order as a form of collateral. The finance company evaluates the capacity of the retailer to make good on the payments, and it also takes into account the kind of profit you’ll make on the deal. Depending on the details of the purchase order, the finance company can then forward a percentage of the value of the order (such as 50%) to you so that you can then use that advance to pay off your suppliers.

Actually, you don’t get the money. Your finance company pays off the supplier with a letter of credit once they’ve made their deliveries, and then the retailer pays the finance company. The finance company then forwards you the rest of your money once the retailer has made payment minus the fees it charges.

Additional Services

Of course, the retailer won’t pay in cash right away. Usually, you get an invoice and the retailer will pay you in 30 days. With some retailers, the waiting period can be as long as 90 days. The finance company can then advance the money for the invoice so that you can get your cash immediately. This service is usually part of the service that comes with international purchase order financing.


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