Don’t Lose That Deal: Profit From Purchase Order Financing

By  Kittikun Atsawintarangkul

Image by Kittikun Atsawintarangkul

Purchase Order Financing

Companies that buy goods from a supplier in order to sell them to an outlet that has already ordered them can use Purchase Order Financing if their working capital budget is stressed. The goods purchased from the supplier may be finished goods or raw goods that the company completes before shipping them to the outlet that ordered them.

The following is an example:

Ackmee Doohickey Company receives a purchase order from Big Ole Mart for 1,000 doohickeys. Sales have been good but got even better quickly. Ackmee only has 400 doohickeys in stock. If Ackmee tapped into their working capital to buy 600 more doohickeys from their supplier, it would give them a cash flow problem. If Ackmee doesn’t provide 1,000 doohickeys to Big Ole Mart they will lose all future sales to them. Solution – short term Purchase Order Financing.

Here is how purchase order financing works.

  1. Your customer issues your company a purchase order for goods.
  2. Your company secures an agreement for the goods with their supplier.
  3. Your company arranges financing from a PO lender.
  4. The PO lender verifies the purchase order and confirms the supplier’s creditworthiness.
  5. The PO lender pays your supplier for the goods.
  6. Your supplier produces the goods and ships them directly to your customer.
  7. Your customer then:
    1. Pays the PO lender upon delivery. The PO financier forwards the profit to your company which is the purchase order amount minus the loan amount and PO discount fee (usually around 1% to 5% of the purchase order). So if the purchase order sold to the buyer was for $100,000 and the supplier cost was $80,000 and the PO discount fee is 3%, your company would receive $17,000.
    2. Issues the PO lender a receivable. In this case the receivable is factored. The Factor would also charge around a 3% discount fee for a receivable 30 days out. The PO lender then receives payment from the customer in 30 days. They then forward the profit to your company which is the purchase order amount minus the loan amount and PO discount fee and factor discount fee. So if the purchase order sold to the buyer was for $100,000 and the supplier cost was $80,000 and the PO discount fee is 3% and the factor discount fee is 3%, your company would receive $14,000 after the PO lender is paid.

That’s it. You have profited $14,000 to $17,000 where you would have had nothing before PO Financing. Don’t lose that next big deal because of a lack of working capital.


As a Matter of Factor

As a Matter of Factor

When I am engaging in a small business networking event, eventually someone asks what I do. I explain to them that I get small businesses and commercial real estate investors loans when banks can’t lend to them. It never fails that at least one person in the crowd will respond with, “Oh, so you factor huh”, after which a solemn sigh seems to be collectively released from the crowd.

Well, the “factor” of the matter is, yes, that is one of my many loan products that I can offer. As a matter of “factor”, it is one of my best products. Because of that, I would like to take some time to debunk some myths that are well entrenched in the small business world about factoring. Let’s look at the facts of factoring.

Factoring is simple to understand. Let’s say that you are a company that receives much of your capital from accounts receivable. It may take you thirty days from the time you spend some of your working capital to supply your customer with a product you sold to them, to the time your customer pays.

What if your customer orders double the amount of the product you are selling them? You have to come up with twice the normal amount of working capital to produce the order. You don’t make it a habit to keep twice the capital you need just sitting in an account doing nothing. That is bad business. So now you are in jeopardy of losing your position with your customer if you don’t come up with the capital to produce the goods your customer needs. Both you and your customer lose future sales revenue and your customer looks for another vendor to supply them with what they need.

But wait; there is a solution to the problem. What if you could find someone to buy your receivables before they are due, at a discounted price, and provide you with cash giving you time enough to manufacture and deliver your product.

Welcome to factoring. All you need to do is find a good, non-recourse factoring company.

The factor company I use will do just that without robbing you blind. They are a non-recourse factor, which means that if your customer skips out without paying your receivable, you are not stuck with the bill. How about that for credit insurance? This factor also has some of the best factor rates in the business.

Here is a typical deal. You have a receivable worth $100,000. This factor will buy that receivable for 97 cents on the dollar. They will immediately give you 80% of the receivable, $80,000. You then use the money to manufacture your goods. After the factor receives the rest of the receivable in 30 days, they will give you $17,000 and keep $3,000. Your sales revenues doubled minus 3% of the receivable.

To me, that is something to sigh about… a sigh of relief. That is a deal that not many small business owners would pass up. There are factoring companies that do take advantage of small businesses that need this service. Some factors take as much as 30% of your receivable. To that, I say, it’s your own fault for not shopping around and going with a good factor. Would you agree?


Position Yourself to Get a Non-traditional Small Business Loan

In a world where traditional banks have cut back on their small business lending, small businesses have had to scramble, sometimes unsuccessfully, to raise working capital. To the shock of many small businesses, getting a small business loan from a traditional bank hasn’t been as easy as it may have been in the past. When this happens, the search for an alternative source of borrowing is on. This is where non-traditional lenders step up.


Many small businesses seeking more working capital are unaware that there are other borrowing options out there. Well, there are. Actually, there are many different options for borrowing the working capital they need. These non-traditional lenders do not conform to the same underwriting guidelines as a regular bank.


One example is a lender that will not consider the small business owner’s personal FICO score as a major factor in its underwriting process. This type of lender will focus more on the health of your small business. To do this, they look at your small business’s cash flow using your business bank statements. They also consider your annual revenue.

Here is how to position yourself to get a non-traditional loan based on your cash flow. We will discuss the minimum criteria and then the average criteria. First, the minimum criteria:

  • FICO = 500 or better.
  • Annual revenue = $100k or more.
  • Minimum monthly business bank balance = $1k/month for the last three months.

This type of loan may get you up to $35k in working capital.

Here is the criterion for an average loan that may get you up to $100k in working capital:

  • FICO = 620 or better.
  • Annual revenue = $150k or more.
  • Minimum monthly business bank balance = $3k/month for the last three months.


These are just ballpark figures to position you to get a non-traditional, business cash flow oriented working capital loan. If you meet, at the least, these requirements, though, you are well positioned to get some decent working capital funding.

For more information on small business loans, go to or Google Specialized Capital Funding.