In today’s fast-moving global e-commerce economy, traditional financing options often move too slowly to keep up with opportunities for growth. The traditional bank loan is an excellent example. Bank loans are competitive, the application process is lengthy, the pre-qualification requirements are stringent and the answer is often“no.” However, just the opposite is the case with PO financing (also called PO funding or purchase order funding). For this reason, companies such as wholesalers frequently turn to PO financing to take advantage of growth and profitability opportunities.
PO Financing Explained
Purchase order financing helps companies gain access to funding or a line of credit very quickly. PO financing works best for companies like wholesalers, resellers, import-export businesses, service contracts (government, public or private sector), apparel or retail companies and similar types of businesses. PO financing is designed to provide short-term working capital to help you accept a larger order than your current supply of ready cash or lines of credit can accommodate.
PO Financing Qualifications
Because qualifications for PO financing are based on having a purchase order or credit-worthy client in-hand, the burden of proof that you can pay back the funding is eased. While qualifications may vary slightly between lenders, the essentials of PO financing qualifications remain the same.
- Minimum length of time in business. The industry standard for granting PO financing is that the company must have been in business for a minimum of 12 consecutive months prior to the extension of funding.
- Company operations based in the United States. For U.S.-based lenders, funding will only be extended to businesses whose operations are based in the United States.
- Minimum built-in profitability. PO financing is designed to help businesses grow quickly. A minimum 25 percent profitability built in to the pending order is typically required to qualify.
- Minimum initial transaction amount. It is typical to require a minimum transaction amount such as $100,000 for the initial order before PO funding will be approved.
- Prior experience with similar client types. The business requesting PO funding must be able to prove it has served the same or similar client types in the past.
- Proof of financial need. Proving financial need is simple: The applicant must show proof of a pending order, a credit-worthy customer who wants to do business, a letter of guarantee or letter of credit or other similar document that meets the qualifying criteria for the lender.
Wholesalers and PO Financing
One of the biggest obstacles wholesalers face when it comes to business growth and profitability is the inability to accept orders that are larger than the company’s cash reserves will allow. Without access to greater cash reserves or a line of credit, they are unable to successfully compete for market share against larger and more established competitors in their industry. Here is where PO financing can make the difference between stagnation and growth.
Companies that can accept the larger orders will claim market share, grow their profits, reinvest into their business and take another leap forward. With PO financing, you can seek out those larger orders actively to grow your business. As soon as you have located a credit-worthy customer who wants to place a large order with you, you can apply for PO financing using their letter of credit or guarantee to qualify. Once you get the financing in place you can fulfill the order and establish an ongoing contract with that customer and other similar companies.
PO financing is a respected form of short-term credit that can boost ready cash, allowing for purchase of products, materials, inventory and even project-specific labor and overhead. As a wholesaler, PO financing might just be your ticket to the expansion you know your company is ready to handle.
About the Author: Raul Esqueda is founder and CEO of 1st Commercial Credit LLC (www.1stcommercialcredit.com) in Austin, Texas. Raul has experience funding businesses of all industries and sizes in the United States, United Kingdom and Canada and has written many articles about purchase-order finance, factoring and asset-based lending.