Fast & Easy Purchase Order Funding for Your Small Business

In business transactions, a purchase order (PO) is a contract between a buyer and a seller. Once the two parties agree on the pricing and quantity, the buyer issues a PO, and the seller issues an invoice after the order is delivered. For small businesses, receiving a sizable purchase order usually indicates a growth opportunity. The consideration is usually that, to fulfill that order, cash is required up front. Many emerging or early-stage companies will struggle with obtaining the upfront cash or working capital to pay suppliers to fulfill the PO. This is the critical moment where Purchase Order (PO) financing may help. PO financing allows businesses to take on larger orders without risking their cash flow, allowing for business continuity while the demands of a growing volume of orders are met.

The Problem With Purchase Orders

However, every new company can't have the liquid cash required to fill every order, especially when more than one order has been put through. Like many other small businesses, coping with cash shortages is a frequent event. As the evidence shows, almost 60% of small business owners find cash flow problems very disturbing every month. Here comes the role of small business PO financing, ensuring you don’t miss out on the potential of making a big sum of revenue or worrying about your reputation.

As said, small and medium-sized businesses (SMEs) generally find it difficult to deal with cash flows, particularly when they get huge orders but do not have the initial capital to meet them. PO funding solutions for SMEs are a source of funding wherein businesses can obtain funds to finish such orders so that they can grow and carry on their business.

What is PO Financing?

PO finance is third-party financing for a short duration, where funds are advanced to fund the expense of fulfilling a purchase order. PO finance enables firms to pay raw materials suppliers or finished products without using working capital. The third-party financier gets repaid, along with fees, upon delivery of the order and its payment by the buyer.

How PO Financing Supports Small Business Growth?

• Cash Flow Management: Small businesses are most likely to experience cash flow deficiencies between order receipt and order fulfillment. PO funding solutions for SMEs guarantee smooth running.
• Business Expansion & Growth: With the possibility of taking big orders, businesses can expand operations without the burden of advance payment.
• Payment to Suppliers: This facilitates prompt payment to suppliers, maximizing relations and easing negotiation for favorable terms.
• Sustaining Creditworthiness: Small Business PO financing prevents companies from over-borrowing or paying bills late to vendors, which can hurt their credit rating.

How Does Small Business PO Financing Work?

Small business PO credit is a type of financing that allows companies to cover large orders in case they are short of money.

The following is a step-by-step procedure on how it works:

Acquiring a Big Purchase Order

• A small business receives a large order from a buyer but lacks the finances to fund it.
• The new or prospective buyer could be ordering in bulk, which is larger than the working capital of the business.

Approaching a Provider of PO Funding Solutions for SMEs

• The business provides information on the purchase order, such as the buyer's details, vendor details, and the cost of fulfilling the order.
• The PO financing institution evaluates the validity and viability of the order.

Lender's Appraisal and Approval

• The lender evaluates the business's credibility, the credibility of the customer, and the ability of the supplier to deliver the order.
• In the event of approval, the lender undertakes to finance a percentage or the entire funds needed to manufacture the goods.

Payment to the Supplier

• Rather than advancing the money to the company, the lender pays the supplier to produce and deliver the goods.
• This keeps the funds working for the desired purpose and lowers risk to the lender.

Delivery of the Goods to the Customer

• The supplier produces and delivers the order to the customer independently.
• Quality assurance and timely delivery are the responsibility of the business.

Customer Payment Collection

• The company is remunerated by the client directly, or the client remunerates the lender as per the terms of the funding agreement, in some situations.
• Payment terms depend on the discretion of the arrangement between all concerned parties.

Fee Deductions and Release of Fund

• After receiving the payment from the buyer, fees and finance charges are deducted by them.
• The rest of the money is paid to the supplier, completing the transaction.
• This facility enables supplier to take larger orders without putting pressure on their cash flows, hence maintaining smooth operations and business development.

Types of Small Business PO Credit Options

1. Conventional Small Business PO Financing

• Suppliers receive payment directly from the lender.
• Best suited for those who possess large, firm orders.
• Interest cost is dependent on risk assessment.

2. Invoice Factoring

• The company sells due bills to a financier at a discounted price.
• Spontaneous cash flow support without assuming any debt.
• Ideally suited for those with slow buyers.

3. Trade Credit Financing

• Firms are offered credit terms by suppliers to buy goods.
• No interest if settled within the time frame provided.
• Aids cash flow and management of suppliers' relationships.

4. Bank Loans & Overdrafts

• Straightforward loans for the settlement of payment orders.
• Overdraft facilities to manage short-term cash deficiencies.
• Best suited for companies with good credit history.

5. Government-Supported PO Funding

Different MSME schemes provide PO finance assistance.

Examples: CGTMSE, Mudra Loans, and SIDBI financing.

Low rates of interest with longer tenure repayment.

Table: Comparison of Small Business PO Credit

Benefits of PO Financing for SMEs:

• No Collateral Required: PO financing is usually unsecured, unlike the traditional loan.
• Quick Access to Funds: Companies get funds in days, enabling them to dispatch orders quickly.
• Growth without Debt Burden: Since the funding is repaid after payment of the invoice, it does not entail long-term debt..
• Improved Acceptance of Orders: SMEs can accept big orders without worrying about having insufficient working capital.

How to Request Small Business PO Financing?

• Evaluate Funding Requirement: Find out how much and verify if the order is eligible.
• Select a PO Funding Lender: Compare lenders for rates, speed of funding, and terms.
• Provide Documents: Provide business finances, purchase orders, supplier contracts, and customer information.
• Approval & Disbursement: The lender applies and, upon approval, disburses to the supplier.
• Order Fulfillment & Repayment: Upon order fulfillment and customer payment, the lender deducts the fees and disburses the balance.