What Are the Qualifications for Purchase Order Financing ?

Cash flow is everything for entrepreneurs running a successful business. However, cash flow management remains to be one of the biggest challenges that they constantly face from time to time. Because of this, many entrepreneurs opt to take out small business financing such as PO financing to help them cover the costs of doing business. Without it, entrepreneurs will keep declining client orders because they can’t afford to fulfill such large shipments. 

What Are the Qualifications for Purchase Order Financing

Having to turn down orders may not be so damaging at first, but in the long run, it could affect your business’ reputation. As a result, your customers would lose their confidence in your company which can lead to a loss in revenue.  Now, for striving businesses, this will not suffice. They have to be able to find a way to fulfill and afford the supplies their clients need. 

PO Financing: What It Is

Purchase order (PO) financing is a financial resource that most business owners use today to fulfill large orders from customers. Essentially, a third party company provides funds to the business so they can fulfill the purchase order of the company’s clients. It’s a useful tool for businesses since it allows them to take more orders from customers even if they don’t have enough incoming cash flow. 

Oftentimes, lending companies can finance the entire purchase order while in other cases, they may only finance a part of it. As a result, the company has to shoulder the remaining costs. Once the supplier has been paid, they will then complete the order and deliver it to the customers. The receiving party then pays the invoice to the purchase order financing company. 

What are the Qualifications for PO Financing? 

PO financing is easier to qualify for compared to traditional bank loans. But like other small business loans, the company should meet some qualifications imposed by the lending company. Although the requirements vary from lender to lender, the company should at least meet the general requirement. 

Here’s what you need to qualify for purchase order financing:

 

  • The company must be a straight resale transaction 

 

Straight resale transaction means the business should obtain goods from their supplier and sell it to its customers without making any modifications other than on the packaging and brand. Aside from that, they will also consider whether you have dealt with this type of transaction in the past or not. Ideally, when applying for a PO funding, it shouldn’t be your transaction for that specific product. 

  1. The transaction should at least reach $20,000 

Lending companies have also imposed a minimum amount to be considered for PO funding. In general, purchase order financing companies need a specific transaction to be worth at least $20,000. But then again, the value may vary depending on the guidelines of the financing company. 

  1. Customers must be creditworthy

One of the advantages of applying for PO financing is that your company doesn’t need to have a good credit history to qualify. However, although the lending company won’t look at the business’ creditworthiness, the customer’s credit history will matter since they will be getting the payment for the cash advance from them. That is why credit companies may perform a detailed credit investigation of the business’ clients to determine their creditworthiness. 

 

  • The suppliers should be reputable

 

Lending companies will also look at the capability of the suppliers to fulfill orders and their quality of work. Suppliers are more likely to experience a financial problem if they ask for a prepayment to be able to afford production. If your supplier is doing this, then your chance of approval dramatically decreases and may even be rejected, as what happens in most cases. 

 

  • The owners should be free of legal issues

 

Lenders think that a small company is just as efficient as the owner. If the company owners have a bad background or reputation in the past, it could endanger the company and lenders would be more inclined to reject the application for PO financing. Because of this, entrepreneurs who are planning to apply for a PO funding should at least make sure that their background is clean and they have no pending legal issues to resolve to increase their chances of approval. 

Learn More About PO Financing 

The ones listed above aren’t the only qualifications needed for PO financing. However, those are the major factors that could affect your loan application approval. If you’re not sure whether you’d qualify for this type of financing or not, feel free to ask for help from the lending experts at SMB compass. They are qualified to provide small business owners with advice regarding what business loans best suit their company’s current needs. 

 

 

 

Posted in: Finance