There is nothing sweeter than the moment you realize you have a winning product. Buyers answer your calls, customers leave great reviews, and now is your time to watch all of that hard work lead to getting your brand noticed by some of the world’s largest retailers.
Key Takeaways
- PO financing funds up to 100% of cost of goods using a confirmed purchase order as collateral.
- Lenders typically advance 75-85% of invoice value once goods are delivered to the retailer.
- It’s transaction-based, not credit-history-based, making it accessible to young or small companies.
- Markup costs run roughly 2-4% of COGS, layered on top of existing financing like factoring or asset-based loans.
But wait, there is a lot of work to do first. Working on massive orders requires a different type of thinking. It might require updates to production processes, scaling your logistics team, updating your marketing, and sourcing the funds to pull it all together. Sourcing the service providers to help build up an infrastructure in support of a fast-growing business can be plug and play. Today’s technology and the all-inclusive platforms for consumer packaged goods (CPG) operations management make that possible. Funding, however, tends to require a more bespoke fit to make sure you have exactly what you need in order to build a successful business.
Purchase order financing is a tool that CPG companies have been using for decades to finance the growth of their brands into businesses like Walmart, Walgreens, and Bed Bath & Beyond. It provides the ability to leverage purchase orders in order to finance 100% of your cost of goods. With the right purchase order financing partner, it is possible to deliver on time every time, regardless of the size of your orders.
What is Purchase Order financing?
In its simplest definition, purchase order (PO) financing is where a financial firm will finance the production or acquisition of products for resale to credit worthy buyers. After receiving a non-cancellable purchase order from a customer (also known as the retailer), a lender will arrange for payment to be made directly to the supplier or manufacturer of the goods.
After the delivery of goods, the customer will issue payment (most likely direct to the purchase order financing company) based on the negotiated terms. The calculation of how much funding will be provided is typically somewhere between 75% and 85% of the resulting invoice amount from when the goods will be delivered to the customer(s).
Why is PO financing important?
With so many lending formats available today, including accounts receivable lines of credit, term loans, cash advances, and asset-based loans, it’s important to find the specific program that suits the needs of your company. A high-growth company expecting large purchase orders from customers has a specific cash requirement to fund those purchases. Unfortunately, most lending programs are not suitable to fill that need.
Many lenders are typically focused on past performance and historical data. Purchase order financing is structured in a way to assist with future deliveries. It allows brands to successfully fill large purchase orders without stressing out the cash flow that’s needed to run the rest of the business.
More than anything else, it levels the playing field just a little bit for younger businesses. Now more than ever, it’s possible to increase revenues in a short period of time once a few major retailers want your products on the shelf.
This transactional type of financing allows companies of all sizes to source capital as needed to take on these large opportunities. Walmart issues a $15,000,000 order for the holiday season? No problem. Target wants to roll out your product in all stores? Bring. It. On. Costco? Sure, we can handle that size of an order!
Who can use PO financing?
PO financing is a tool that can be used by most types of companies. As long as there is a non-cancellable purchase order from a creditworthy customer and a reliable source of product, you can use PO financing to produce those goods. Of course, there are some technical nuances to note. Candidates of this type of financing should not have any current Uniform Commercial Code (UCC) filings or competing liens on the inventory to be purchased or the resulting accounts receivable.
Oftentimes, companies will look towards PO financing in order to supplement a current financing program. This could be the case if there is already a factor or asset-based lender in place. The PO financing company will work alongside them to provide additional capital as needed to help a brand achieve its goals.
How does purchase order financing actually work?
A lender pays your supplier directly after you receive a non-cancellable PO, then collects payment when the retailer’s invoice is settled.
Is PO financing only for large, established companies?
No. It’s transaction-focused rather than credit history-focused, so startups with a valid PO and a reliable supplier can qualify.
What disqualifies a business from PO financing?
Existing UCC filings or competing liens on the inventory or resulting receivables typically block eligibility.
How much does PO financing typically cost?
Rates generally run 2-4% above the cost of goods sold, tied directly to the financed transaction.
Can PO financing be combined with other funding sources?
Yes. It’s often layered on top of an existing factoring arrangement or an asset-based lender for additional capital.
Mythbusting some PO financing information
Running a business is hard enough in today’s market. Running a business with misinformation makes it even harder! Here are a few common misunderstandings about PO financing.
- It’s super expensive—rates range from 2-4% above your cost of goods sold (COGS). Since this is related directly to your transaction, managing these costs is simple, and your sales prices can reflect the additional COGS from financing.
- PO financing is only accessible to well-established businesses—Nope! PO financing is a great resource for young startups and existing businesses. Since it is a transactionally focused type of lending, PO financing companies aren’t so concerned with your P&L, balance sheet, or time in business.
- My customers won’t buy from me if they know I’m using a funding company—Nope! In fact, they will feel confident that you can fill larger orders because you are backed by a reputable financial firm.
RangeMe is a great platform that provides exposure for brands of all sizes looking to make connections with retail buyers. Hopefully, it leads to successful relationships that result in receiving large orders from major retailers and other buyers. Once those purchase orders start flowing, PO financing can help you bridge that financial gap to get goods produced and delivered right when you need them. Good luck!
Do you have questions about PO financing? Reach out to Star Funding on RangeMe here.