Categories
Purchase Order Finance
Growing your business often requires you to stretch to the very edge of your means. In some instances, this can mean accepting an order from a customer that requires a major investment in terms of stock that you cannot accomplish alone.
The idea that you are sitting there with a trusted purchase order from a customer but you don’t have the cash flow to fulfil it can be extremely frustrating.
Thankfully, purchase order finance is here to solve that very quandary.
Contents
What is Purchase Order Finance?
Assessing Creditworthiness - The Transparency of Purchase Order Finance
How Purchase Order Financing Works
The Cost of Purchase Order Finance
5 Alternatives to Purchase Order Finance
Recent Business Finance Case Studies
The Pros and Cons of Purchase Order Financing
Purchase Order Finance with Clifton Private Finance
What is Purchase Order Finance?
Purchase order finance (or PO finance) is a form of short-term cash flow finance that’s provided by lenders to bridge the gap between a customer placing an order and the final invoice being paid for that order.
It has some similarities to invoice finance, in that the funds secured are leveraged against the payment of a future invoice, but rather than being based on accounts receivable, it is instead secured against the security of a purchase order from a well-established customer.
Finance a Purchase Order - How Important is Credit History?
One of the major differences between PO finance and many other forms of business funding, is that the risk assessment for the loan is based on your customer, and not you.
This has both advantages and disadvantages.
As a considerable pro, this enables younger companies that have not built up a strong business credit score to expand to complete orders that would be otherwise completely beyond their means.
However, many companies do worry about the downside of this arrangement - namely that your customer will be fully aware of the financing being leveraged against their creditworthiness.
They will also be dealing directly with the lender when final payment on the order is to be made.
This can potentially damage your relationship and give them reason to consider your company in a different light; especially regarding your size and financial status.
It is essential when considering purchase order financing, that you consider the transparent nature of the product in full before moving ahead.
It’s worth speaking to a Clifton Private Finance advisor if you have any questions about this aspect of the funding or whether there are any worthwhile alternatives to consider.
See the latest market news below.
2024 Business Finance Market Update
In the past year, business finance saw significant growth, perhaps surprisingly driven by challenger lenders and alternative finance providers. Many of these lenders reached their largest milestones in 2024, primarily through supporting SMEs that may have struggled to access traditional funding elsewhere.
Businesses are continuing to face significant economic challenges carried over from 2023. High inflation, supply chain disruptions, and geopolitical tensions persist, which have complicated financial planning and made it difficult for businesses to acquire funding.
But the Bank of England has cut its base interest rate for the first time in 4 years, signalling a cautious shift toward economic stabilisation after years of inflationary pressure. Further cuts are anticipated, and businesses can expect a flurry of spending in the coming months.
As well as this, a number of banks and large firms seem to be racing to the finish line to implement generative AI and new technology that could streamline business and boost profits. Enhancing tech in banking looks like a win-win for lenders and borrowers, offering more personalised financial solutions and a quicker, more secure process.
In the tech industry, investments in AI are reshaping business. Tech giants like Alphabet, Amazon, and Microsoft have seen their market values surge, driven by the rush to implement AI.
How Purchase Order Financing Works
The stages of obtaining PO finance are as follows:
1 - Get the Purchase Order
You will need an official purchase order with an associated PO number to begin PO financing. These can differ from company to company, but you cannot apply for funding without one.
The more reputable your customer is, the more likely you are to be able to obtain PO funding.
2 - Apply for Purchase Order Finance
There are a wide range of lenders who offer PO finance, but finding the company that’s right for you can be complicated. Fees can vary wildly, so it’s worth consulting with an expert business finance broker to gain access to the best deals.
3 - Risk Assessment
The finance provider will undertake a full risk assessment and determine if the financing can go ahead. Remember, even if rejected, you can look to an alternative provider.
4 - Receive the Funds
The finance company will provide you with the capital needed. This may be up to 100% of the money you need to fulfil the order, and can be provided as rapidly, depending on the terms agreed with the finance company.
5 - Complete the Order
You undertake and complete the order as arranged.
6 - Invoicing
Once the order has been completed, you invoice the end customer and supply a copy of the invoice to the finance company.
7 - Payment Received
When financing a purchase order, it is the finance company’s role to receive the payment from your customer. They will deal with this side of the arrangement and you need do nothing here.
8 - Remainder Paid
Once the invoice has been paid to the finance company, they will deduct their fees and the initial principal of the loan and forward the remainder to you.
How Much Does it Cost to Finance a Purchase Order?
Purchase order finance is a business loan based on a fee arrangement rather than incurring interest.
These fees can vary based on the finance company as well as other factors, such as their risk assessment based on the customer’s creditworthiness.
Fees for PO finance currently range from 1.8% to 6%. To obtain the best rates possible, it’s important to talk to a specialist.
Speak to our expert purchase order finance team at Clifton Private Finance for the best deals.
5 Alternatives to Purchase Order Finance
PO finance is a niche product with a very specific usage that gives you the unique opportunity to leverage your customer’s credit status to procure funding, however, there are other business finance alternatives that can help you obtain the capital needed to supply the order in other ways.
These include:
- Unsecured Business Loan - The ‘go to’ loan for many businesses, an unsecured loan may be able to provide the funds you need to successfully fulfil the order. As unsecured loans are based on your business credit history, these are most suitable for companies in good financial stead with an established track record of postitive financial management.
- Secured (Asset-Based) Business Loan - Utilising a business asset as collateral for the loan, a secured business loan will offer superior rates to many other loan types.
- Lines of Credit - Short term cash flow can often be smoothed with easily obtained revolving credit facilities. These include credit cards and overdrafts. Specialist revolving credit facilities are also available to suit your business need.
- Revenue-Based Funding - For businesses projecting strong future sales, including e-commerce businesses, revenue-based finance (RBF) can ofter a flexible solution. Read more about revenue-based financing in our specialist article.
- Invoice Finance - Split into invoice factoring and invoice discounting, invoice finance options are B2B solutions that are similar to purchase order finance. Consider them if you are already at the stage of invoicing your customer or if you have other outstanding invoices that may be leveraged to release the required capital.
Related: Invoice factoring vs discounting
Understanding the wide range of business finance options can feel like a full time job - and that’s because it is!
At Clifton Private Finance our team work consistently to find the best deals on the market and are here to help you get the finance solutions you need. Speak to one of our experts today to see what funding is available to suit your business.
Recent Business Finance Case Studies
The Pros and Cons of Purchase Order Financing
Like any funding option, PO finance has its positives and its negatives:
- Pro: Expansion Opportunity
Growth is essential for every business and being able to take advantage of opportunities is key to expansion.
When a potential order comes along that can propel your company forward, the last thing you want to do is turn it down simply because you don’t have the funds to make it happen. PO finance is perfect for turning these potential disappointments into working realities.
- Pro: Tailored Risk Assessment
Another factor that makes it very difficult for growing businesses to access the funding they require is the weight placed on their creditworthiness for finance risk assessment.
PO funding is unique in that it puts the largest part of that assessment on the reputation of your customer rather than your business's, providing greater funding than your business might be able to otherwise obtain.
- Pro: Speed of Application
The decision-making process for PO funding needs to be rapid by nature; after all, too much delay and the risk of your customer going elsewhere increases.
Thus, most finance providers are quick to make a decision on your purchase order finance and clear the funds for you as swiftly as possible. This is even more true if your customer is reputable and risk assessment easy.
- Con: Transparency and Business Reputation
We already covered this in detail above, but it’s essential you consider how the open nature of purchase order financing impacts your supplier-customer relationship.
- Con: Fees
While it is possible to get finance a purchase order with very competitive rates, a lot depends on factors outside of your control. It may be that the fees linked with the PO finance are off-putting.
- Con: Limited Use
As a specialist, niche product, PO finance is very good at what it does, but it’s only useful at that one thing. Funds obtained through purchase order finance cannot be used for any other purpose.
How to Finance a Purchase Order with Clifton Private Finance
At Clifton Private Finance, we work with you to obtain the best finance for your business.
When it comes to purchase order finance, our specialists can explore the entire UK funding marketplace to find the most suitable options for you. Speak to one of our dedicated team today to learn more and give your business a boost.
See your Purchase Order Funding Options »
