Purchase order financing is one of the common funding options small and medium-sized businesses turn to. It is a solution for businesses that cannot fund customer orders because they have low cash flow. Therefore, you do not have to give up on business growth and expansion opportunities because you lack the funds to supply and meet customer orders. The customer will pay the purchase financing company directly in this type of funding. They will then deduct what is owed to them and send you the remaining amount as profit. This article attempts to explain everything there is to know about order funding. Keep reading for more insights on the same. You will be surprised at how easy it is to make money and grow your business even if you have insufficient funds.
Purchase Order Finance – What it is
Businesses do not have much room for error or interpretation, thanks to order purchases. These are documents used to confirm and clarify deals or any business arrangements. The purchase order finance is a guarantee that clarifies details on quantities, product terms, and any other details in the deal. But what exactly is purchase order finance?
Purchase order finance, also known as purchase order funding, refers to purchase orders as a guarantee to finding investment, financing, or fund for a business.
For example, a small sole proprietorship can manage to secure business with a larger corporation or state company; the small business can use the purchase orders from the large companies to secure funding or financial support from a financier.
The Cost of Purchase Order Financing
Every purchase order deal is evaluated by the funding entity or finance company. Usually, the cost of funding is calculated based on a percentage of the gross profit and the security of the final transaction. However, each calculation is done on a case basis since different financing companies have different offers and terms.
Why you Should Consider Purchase Order Financing/ Funding – Is it Worth it?
Well, several advantages come with this type of funding. Below are a few of these benefits.
1. They are Available for New Business
Unfortunately, the sad reality on the ground is that most traditional financiers, such as banks, are only available to established businesses that have been around for years. This means that businesses trying to make a mark and find their place in the industry are often left out due to a lack of finances. In addition, traditional credit lines often require years of audited financial statements, which most startups lack. Fortunately, these startups can apply for purchase order financing as long as they are creditworthy and have a proven track record in the industry.
2. Boost Business Growth
Business expansion is one of the challenging things to deal with as a business owner. However, with purchase order financing, you can conveniently grow your business as the order financing increases. Moreover, stable and better purchase orders often translate to more financing, which works positively for any growing small business.
3. Purchase Orders are Fast and Efficient
Thanks to the bottlenecks involved, ordinary bank loans will take ages before processing. However, once a purchase order has been approved, releasing funds is often expedited, and minimal delays are experienced. You can always be sure of accessing cash from your funding company faster, thus getting the capital to start your business. Additionally, you could also have the financier pay your suppliers directly and promptly, thus supporting your business growth and expansion.
Demerits of Purchase Order Funding
Purchase order funding is not all good and glorious. There are a few things you need to consider when making your purchases. It is important to know the caveats in using purchase orders as this will protect you, the business, clients, and financiers. Some of the downsides of this type of purchase order include:
1. Workflow Process Limits
It only works for companies that have a direct relationship with the customers. Purchase orders are given to companies that supply directly to customers. Other types of businesses may be locked out from this type of funding. It means that the transaction processes of a financing company purchasing the business stock will be straightforward. This means that businesses simply part of a longer production process will not receive purchase order financing.
2. Promotes an On-Going Dependency
This form of financing can be a problem when small businesses turn to it as a source of short-term single-order transactions. It does not encourage some companies to think outside the box. This is a disadvantage because it brings about a future funding expectation for small businesses. If not properly managed, this can result in a situation where the small business does not break even or make sufficient money to sustain itself and depends on the financier every other time.
3. Yields Minimum Gross Margins
This type of funding often yields minimum gross margins. For example, only 20 percent gross margin is yielded for each transaction in most cases. If the stock is small, it is more difficult to convince a financier to support the business because of a lack of incentives.
Applying for the Purchase Order Funding
When applying for a purchase order funding/ financing, a specific process is followed. The process works as follows:
- You first need to make your application through the Funding Hub application form.
- You will receive an email that requests more information and documents if you fail to provide it all straight away. You need to know what the requirements for this section is. Check them out to see what you need.
- The Funding Hub team will then proceed to review your application. This only happens when you have sent them all the required information and documents. Note that the review process takes about twelve hours to complete the process.
- Once done, the company will find you the best PO funder in the country (South Africa) based on your business needs and specific PO.
- The information on your details and application is then passed on to that funder, who will get in touch with you directly to confirm everything.
- You will then deal with them directly to complete your application.
- If your application is successful, you should have your money soon. Funds are normally disbursed anywhere from 3 to 4 days but can go up to 2 weeks.
- If your application is not a good fit for that funder, it is possible to get back in touch with the funding hub, who will find you an alternative.
The Duration Purchase Order Application Takes
Usually, purchase order applications are treated with urgency since time is of the essence. When a business turns to a PO, the chances are that they have exhausted all other avenues or are in dire need of funding and cannot afford to waste time. The speed of the application process depends on the applicant. The process goes faster when all the documents needed are within reach. The timelines can be considered from this point on-wards. To hasten the process, make sure to follow the steps below.
- Submit your application through Funding Hub.
- Process and transfer to preferred funding partner on the same business day (as long as the application is submitted before noon).
- The funding partner contacts you that afternoon or the following workday.
- If all the documentation is ready, the application goes under consideration for between 3 and 4 days, depending on the partner involved. It could go faster or slower based on the funding partner chosen. Some may be up to a week. It also matters how big the deal is and how many parties are involved in such a deal. You should expect it to take longer (often not more than a week) if a lot of due diligence is required to verify several things.
- When the application (hopefully) is accepted, you get the funds disbursed. If not, you could try an alternate funding partner.
You should be open to any variations because the results depend on how busy the funding partner is and the type of application you made. The only part of the application process whose speed is guaranteed is the funding hub side. As for the rest, you have to wait for the funding partner to proceed at their speed, hopefully as fast as you desire.
Tips to Get Quick Purchase Order Funds
There are a few ways you can expedite a purchase order fund, especially if the situation is extremely urgent. Below are practical tips to consider.
1. First, you must ensure that all relevant documentation is in place. You may have to check out the requirements beforehand to verify that each document needed for the purchase order success is in place. The documents you will need include:
- Proof that you are a registered company with the CIPC. This means an associated registration document, registration number, and business name must be there.
- The purchase order from a government department or a reputable company
- A quotation from the supplier of the goods you provide (You must include this if your company is responsible for it.)
- Tax clearance certificate (this may not be needed all the time but have it ready just in case it is required)
- ID documents of all directors of the company
2. Ensure you have a supplier with a quotation that can be submitted. Also, be sure that the supplier can deliver the goods required when needed (it must be within your timelines). If they are not in a position to, you should find another supplier.
3. At this stage, apply for a purchase order fund and make sure to put a due date. This will ensure that your application is prioritized because of its urgent nature.
4. Be sure to submit all documents during the application stage to be passed to the potential funding partner as quickly as possible.
5. Stay close to the phone and answer your calls. It is surprising how many people fail to answer calls from funders, yet they need business capital. The faster you answer the calls and supply the required information, the faster your funds are likely to be released.
Why Do You Need Purchase Financing Order
Now that you have an idea of how to apply for the purchase order financing, the big question remains if you need to apply or not. Yes, you need to apply for purchase order financing if (your small company) you receive an order that is larger than you are capable of handling. However, rather than letting the chance slip away from your company, it is best to consider getting the necessary funding to support the business deal at the time.
Besides that, this is an opportunity not to let your clients down, as well as increase your chances of business growth. Therefore, small to medium-sized companies requiring funding to support client order execution should consider purchase order financing a great option. It may be the only way to push the business to the next level comfortably.
When Purchase Order Financing is Relevant
Business size matters. These kinds of funding are best suited for small to medium-sized companies that may be struggling with capital for business expansion. However, new small businesses may not need the funding, especially if they still have constant cash flow. However, for small businesses receiving larger orders than they can handle, purchase orders are a great option. Do not let opportunities for business growth pass you by. Instead, capitalize on the opportunities when your business is still in high demand. The secret is to explore purchase funding options available for your kind of business.
Business growth can happen even without the help of traditional financing options. When banks and other financial creditors are not willing to support your small business to grow beyond a certain point, consider purchase order financing if you are qualified for it. Do your research extensively and settle for a choice that works out best for you and your business. Not all financiers are suited for all companies, but there are numerous options, so you never have to worry.