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• 13 Feb

  Purchase Order Finance To Pay Suppliers In The UK Or Abroad

  Purchase order finance allows you to pay your suppliers and enjoy a period of credit until repayment is due. This can bridge the gap between buying products or raw materials and getting paid by your customers. To get quotes for comparison:

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  What Is Purchase Order Finance?

  Purchase order finance (also called Trade Finance or PO Finance) is short-term finance used to pay your suppliers in the UK or abroad. The funding is repaid after an agreed period of credit allowing you to take on larger orders than you would otherwise have been able to fund.

  See our related article: You Only Need Orders To Raise Finance.

  Purchase Order Finance A Way To Boost Cash Flow And Grow Your Business

  Cash flow is the fuel that keeps businesses running smoothly. However, many small and medium-sized enterprises struggle with cash flow issues, hindering their growth potential. That's where purchase order finance can be helpful. This funding allows companies to pay suppliers, fulfil orders and grow.

  This type of PO funding bridges the gap between receiving orders and getting paid by customers.

  By partnering with a purchase order finance provider, businesses can secure the funds needed to source raw materials, manufacture products, and fulfil large orders. This not only helps keep the supply chain moving but also enables SMEs to take on more significant projects and potentially expand their client base.

  Understanding Purchase Order Finance

  Purchase order finance is a specialised type of funding that allows businesses to access capital based on their purchase orders (also called POs). Essentially, it enables companies to fulfil orders by providing the necessary funds to pay suppliers directly.

  This financing solution is particularly beneficial for small and medium-sized enterprises (SMEs) that may not have sufficient working capital to cover the costs of raw materials and production before receiving payment from their customers. By unlocking this form of financing, businesses can access the funding needed to fulfil orders that may exceed the working capital they have in the business.

  The Mechanics Of PO Finance

  The mechanics of purchase order finance are relatively straightforward. When a business receives a purchase order from a customer, it can approach a finance provider for funding. The provider evaluates the purchase order and the risks associated with the transaction and the customers.

  Upon approval, the PO finance provider pays the supplier directly, allowing the seller to ship the products to the customer. This can be for a UK-based supplier or one based abroad.

  Once the customers pay for the orders they receive, the business repays the finance provider, often with a fee or interest that is agreed upon in advance.

  This streamlined process helps businesses maintain liquidity while fulfilling orders efficiently. These services allow businesses to leverage their purchase orders as security for funding. This unique aspect makes it an attractive option for companies looking to grow without having tangible assets against which to raise money. By understanding the fundamentals of purchase order finance, businesses can use this tool to drive growth while maintaining financial health.

  How Purchase Order Finance Can Boost Cash Flow

  This type of funding directly addresses cash flow challenges by providing immediate access to funds needed to fulfil orders. When a business receives a large order, it often faces the dilemma of needing to pay its suppliers upfront while waiting for payment from its customers. This delay can create significant cash flow constraints.

  Purchase order finance solves this problem by allowing businesses to access the capital required to pay suppliers, ensuring that production and shipping can proceed without delay. This access to funds can be the differentiating factor that enables a business to fulfil orders on time and successfully take on larger supply contracts.

  Additionally, utilising purchase order finance can enable businesses to take on larger orders that they might have previously declined due to cash constraints. With the ability to finance purchase orders, companies can expand their client base and increase income potential. This increased order capacity can lead to higher sales and improved profitability, which can further enhance cash flow. Furthermore, as businesses successfully fulfil larger orders, they build credibility and trust with customers, opening the door to repeat business and referrals.

  One of the key advantages of purchase order finance is that it allows businesses to make purchases they otherwise couldn't have afforded.

  The Benefits of Using Purchase Order Finance

  The main benefits of purchase order finance are:

  • Paying suppliers upfront
  • Improved cash flow
  • Quick release of funds to suppliers
  • Enhanced financial health
  • Ability to grow beyond current working capital constraints

  The advantages of this funding solution extend beyond just improved cash flow. One significant benefit is the reduction of financial risk. Traditional financing methods, such as bank loans, often require security in the form of tangible assets. In contrast, purchase order finance relies on the purchase orders themselves, from reputable customers, as security. This minimises the risk for business owners.

  Another benefit of purchase order finance is the speed at which funds can be accessed. Unlike traditional financing that may involve lengthy approval processes, purchase order finance can often be secured quickly, allowing businesses to act promptly on new orders. This rapid funding can be crucial and timing can make all the difference. Businesses can respond quickly to customer demands, ensuring they do not miss out on valuable sales opportunities while waiting for cash flow to improve.

  Moreover, using purchase order finance can enhance a company's overall financial health. By keeping the supply chain moving and fulfilling orders on time, businesses can improve customer satisfaction and loyalty. Satisfied customers are more likely to return for additional purchases and recommend the business to others, creating a positive feedback loop that drives growth beyond current working capital constraints.

  Combining Purchase Order Finance With Factoring

  By combining purchase order finance with a factoring facility, the task of managing all the invoices outstanding to customers can also be passed to the funder. Also, this gives you an even longer period of credit as the factoring can repay the PO finance and the ultimate customer payments repay the factoring.

  Case Studies: Real-Life Examples of Businesses That Have Benefited from Purchase Order Finance

  Case Study 1: Numerous businesses have successfully utilised purchase order finance to overcome cash flow challenges and achieve significant growth. For instance, a small womenswear designer needed help to pay for the import of garments from overseas suppliers. FundInvoice put in place PO finance (aka trade finance) for them to enable payment to be made before the goods were shipped.

  Case Study 2: In another case, a toiletries supplier needed to pay overseas suppliers for imported products. FundInvoice found them a facility that paid for the overseas suppliers and provided factoring to collect in payments from the ultimate customers.

  Qualifying for Purchase Order Finance: What Financiers Look For

  When seeking purchase order finance, lenders evaluate several key factors to determine a business's eligibility. One of the primary considerations is the quality of the purchase orders themselves. Lenders typically look for orders that come from reputable and established customers, as this reduces the risk of non-payment.

  Additionally, the size and consistency of the orders play a role in the assessment; larger, recurring orders are generally viewed more favourably by lenders but this type of funding can be available for one-off transactions.

  Another important factor is the financial health of the business seeking financing. Lenders will often prefer an established financially stable business. However, in some circumstances the financing can be structured to enable a less established company access this type of finance based on the strength of the end debtors rather than their own business.

  Lastly, the relationship between the business and its suppliers is crucial. Lenders assess whether the suppliers are willing to work with the financing provider and if they have a history of delivering quality products on time. A positive relationship between the business and its suppliers is important.

  How to Apply for Purchase Order Finance

  To apply for purchase order finance please contact FundInvoice on 03330 113622. We can suggest providers that would most suit your circumstances from the range of providers that operate within this market space.

  Applying for purchase order finance involves several steps that businesses should follow to ensure a smooth process.

  • First, it’s important to gather all necessary documentation, including purchase orders, supplier invoices, and financial statements.
    
    This paperwork will help lenders understand the business's needs and assess the risk involved in providing financing. Having organised and accurate information readily available can significantly speed up the application process.
    
    
  • Once the documentation is prepared, businesses should research potential purchase order finance providers. A broker like FundInvoice can help you with this step. Different lenders offer varying terms, fees, and levels of service. It's advisable to compare multiple options to find the best fit for your business needs.
    
    After selecting a lender, the next step is to submit the application along with the required documentation. Some financing providers have streamlined online applications, allowing businesses to complete the process quickly and efficiently.
    
    
  • After submitting the application, lenders will review the information provided and conduct their due diligence. This may involve verifying the purchase orders and assessing the financial health of the business. Once approved, the lender will provide a funding proposal outlining the terms and conditions of the financing.
    
    Businesses should carefully review this proposal before accepting it to ensure that the terms align with their financial goals and capabilities. Upon acceptance, the lender will disburse the funds, enabling the business to fulfil its orders.

  Alternatives to Purchase Order Finance

  While purchase order finance can be a powerful tool for enhancing cash flow, it's not the only option available to businesses. One alternative is invoice financing, where businesses can borrow against their outstanding invoices. This option allows companies to access cash quickly without waiting for customers to pay. However, invoice financing may require a business to have a larger volume of unpaid invoices, which may not always be feasible.

  Another alternative is traditional bank loans or lines of credit. These financing options often come with lower interest rates compared to alternative lenders, but they can also be more challenging to qualify for. Banks typically require extensive documentation, a strong credit history, and possibly tangible assets, making this route less accessible for some SMEs. Moreover, the approval process can take longer, which may not align with the immediate cash flow needs of a growing business.

  Lastly, businesses can consider equity financing, where they raise capital by selling an interest in the company. While this approach can provide substantial funds, it also involves giving up a portion of ownership and control.

  See our article about: All The Ways To Fund A Business.

  Common Misconceptions About Purchase Order Finance

  Despite its many benefits, several misconceptions about purchase order finance can lead businesses to shy away from this financing option.

  One common misconception is that purchase order finance is only suitable for large businesses or enterprises. In reality, this financing solution is designed specifically for small and medium-sized enterprises that often face cash flow challenges. Many financiers specialise in working with SMEs, recognising their unique needs and providing tailored solutions.

  Also, some businesses may believe that the application process for purchase order finance is overly complex and time-consuming. While there are documentation requirements, many lenders have streamlined their processes to make it easier for businesses to apply. With the advent of online applications and quick approvals, obtaining purchase order finance can be a relatively straightforward process, enabling businesses to access the capital they need without unnecessary delays.

  Leveraging Purchase Order Finance to Accelerate Business Growth

  Purchase order finance stands out as an important tool for businesses seeking to boost cash flow and facilitate growth. By understanding how this financing option works, companies can effectively address cash flow challenges that often arise from fulfilling large orders that need supplies paid in advance.

  As demonstrated through various case studies, businesses that embrace purchase order finance can experience significant benefits, including increased income and growth. By leveraging this financing solution, companies not only ensure timely order fulfilment but also position themselves to cope with rapid expansion and growth.

  If your business needs to pay its suppliers contact FundInvoice on 03330 113622 to discuss the purchase order finance options that are available.

  By Glenn Blackman