Purchase orders generally operate on good faith and serve as a form of credit between the buyer and seller, outside of traditional banks and financial institutions. They are typically used for non-retail transactions between businesses. When a buyer needs a specific product or service from a supplier or vendor, they generate a purchase order (PO) in their accounting system. 

A purchase order should include the following key details:

• Billing address of the buyer
• Delivery address for the goods
• Product or service being purchased
• SKUs or model numbers of the products
• Quantity
• Price per unit
• Any applicable wholesale discounts
• Payment terms

Once the purchase order is generated, it is sent to the supplier or vendor either by mail or digitally. Upon receiving the PO, the seller typically responds with an order confirmation that includes:

• Delivery date for the goods or services
• Confirmation of the quantities that will ship and are currently in stock
• Information on any backorders, including which products are affected and the quantities needed
• Payment terms

After the goods or services are delivered as promised, the buyer can pay the seller either upon delivery or, if a business relationship exists, under agreed-upon terms such as net 30, 60, or 90 days.

The primary purpose of a purchase order is to maintain a paper trail that confirms the buyer’s intentions. Additionally, purchase orders help ensure inventory and financial accuracy, facilitate faster delivery of goods and services, and are crucial for the accounting departments of both companies involved.

Here’s a breakdown of the typical steps that buyers and sellers take when processing a purchase order:

• Create a Purchase Requisition: The person within the company seeking to purchase goods or services, known as the buyer, creates a purchase requisition document to obtain approval for the purchase.
• Issue the Purchase Order: Once the purchase requisition is approved by the purchasing department, a quote can be requested from the seller. If terms and conditions between the two parties have already been established, the purchase order can be created and issued without a quote.
• Seller Approves the Purchase Order: Upon receiving the purchase order, the seller reviews it to confirm that they can fulfill the entire order as requested. If they can, they approve and confirm the PO. If not, they may amend the purchase order and send it back to the buyer for approval. Amendments might include back-ordered or canceled items and corrections to prices or other details. Once the buyer reviews and approves the amended PO, the seller can begin fulfilling the order.
• Buyer Confirms Receipt of Goods or Services: After the order is fulfilled and the buyer receives the goods or services, they confirm the delivery against the final PO to ensure everything is accounted for.
• Invoice Review: Once the entire order has been successfully received, the buyer reviews the invoice against the finalized purchase order to ensure accuracy. If the invoice is correct, it is forwarded to the buyer’s accounts payable department.
• Payment is Sent: The accounts payable department records the invoice in the accounting system and issues payment to the seller before the payment due date. If inventory financing or funding is used, the backer or lender pays the supplier to satisfy the purchase order, allowing the inventory to be sent to the customer.

For many small businesses, cash flow issues can arise, especially when faced with a sudden surge in demand. You might sell through your inventory quickly but lack the funds to restock. Purchase order (PO) financing offers a solution, enabling businesses to fulfill large orders even when cash flow is tight.

• Seller (You): The business providing the product or service.
• PO Financing Company: The funding partner supplying the necessary capital.
• Supplier: The manufacturer or vendor producing the goods.
• Customer: The retailer or reseller purchasing your products.

Purchase order financing enables you to seize growth opportunities without depleting your cash reserves. For example, a growing brand can use it to expand wholesale relationships, increasing distribution, revenue, and profit. However, a company might lack the upfront capital to produce inventory or may need to wait two to three months for payment from a retailer. PO financing bridges this gap, allowing you to fulfill significant orders and grow your business.

• Receive a Purchase Order: Your customer sends a purchase order specifying the goods and quantities they want. If you don’t have the capital to fulfill it, you turn to a PO financing company.
• Get a Supplier Quote: Request a quote from your supplier for the cost of producing the required inventory.
• Apply for PO Financing: Submit the purchase order and supplier quote to a PO financing company. Depending on creditworthiness, the company may cover 80-100% of the inventory cost.
• Supplier Delivers Goods: The supplier ships the goods directly to the customer, ensuring timely delivery.
• Invoice the Customer: Send an invoice to the customer for the total amount of the sale.
• Customer Pays the PO Company: The customer pays the invoice directly to the PO financing company.
• Fees Deducted: The financing company deducts their fees from the payment and forwards the remaining balance to your business.

By advancing funds to cover production costs, the PO financing company helps you fulfill orders without straining your finances. They assume the risk of collecting payment from the retailer, who might face financial difficulties. This approach provides the liquidity needed to maintain operations and capture new opportunities.

Example Scenario

Imagine you’re a wholesaler of pet supplies, and a major pet store chain places an order larger than what you can afford to produce with your available funds. Rather than miss out on this opportunity, you turn to a PO financing company. They provide the capital to produce the inventory, ensuring you can fulfill the order. When the retailer pays, the financing company takes its fee and returns the remaining balance to you.

By allowing businesses to fulfill large orders without the immediate capital, purchase order financing can be a game-changer for brands looking to grow without cash flow constraints.

Purchase order financing can be a valuable solution for fulfilling unexpected or larger orders. However, like any financial tool, it offers valuable advantages but also comes with important factors to consider. Understanding both can help you determine if it’s the right choice for your business.

Pros of Purchase Order Financing

• Take on Larger Orders: It allows you to accept orders you wouldn’t otherwise be able to fulfill due to limited capital.
• No Repayment Plan: Since it’s not a loan, there’s no repayment plan. The customer pays the finance partner, which deducts its fees and sends you the remaining balance.
• Repeat Access: Once you establish a relationship with a purchase order financing company, future transactions can be quicker and easier.
• Risk Management: If your customer doesn’t pay, the lender, being the first to be owed, will pursue payment, strengthening your collection efforts.
• Credit Flexibility: Poor credit isn’t necessarily a barrier, as the customer’s creditworthiness is the primary concern.

• Impact on Profitability: Lenders typically take a percentage of the total order, which can affect your overall profit margins.
• Associated Costs: Be aware that fees can range from 1.8% to 6% per month, which might affect profitability if your margins are narrow.
• Customer Relationships: Consider how involving a finance partner might impact your relationship with your customer, as their interactions could influence customer perceptions.
• Order Size Requirements: Purchase order financing often has minimum order size thresholds, typically around $50,000 or more, so ensure your orders meet these requirements.

PO financing is ideal for businesses that sell physical products and need to fulfill large orders from retailers or resellers. It’s especially useful for:

• Wholesalers
• Resellers
• Distributors
• Startups
• Business owners with bad credit
• Importers or exporters of finished goods
• Outsourced manufacturers.
• Government contractors fulfilling large government orders

Any business experiencing tight cash flow, rapid growth, or seasonal fluctuations can benefit from PO financing. It’s a valuable tool for those needing immediate capital to meet demand without depleting their resources.

PO financing isn’t suitable for every business. You generally won’t qualify if:

• You’re a service provider.
• You’re a manufacturer.
• You sell raw materials.

These types of businesses typically don’t meet the criteria for PO financing, which is designed for those dealing in finished goods that are resold by retailers.

Purchase order financing is commonly used in industries where large wholesale orders are standard. These industries include:

• Retail
• Manufacturing
• Consumer goods
• Electronics
• Apparel
• Food and beverages

Overall, purchase order financing helps businesses across various industries manage cash flow, seize growth opportunities, and maintain smooth operations even when funds are tight.

Applying for purchase order financing isn’t overly complicated, but it can be time-consuming when you’re searching for the right lender for the first time. The good news is that once you find a lender you like, they can become a reliable partner as your business grows.

When looking for a purchase order lender, it’s crucial to do your due diligence, just as you would with any type of financing. Search online, ask for recommendations from colleagues, and review each financing company’s requirements before applying.

Once you identify a lender you want to work with, be prepared to provide a few key documents, such as:

• Your customer’s purchase order
• Your supplier’s estimate or invoice
• Your invoice to your customer
• The purchase order you submitted to your supplier
• Financial and tax statements, such as your profit and loss statement
• Any relevant business and legal information

Each lender has different criteria, but there are some common requirements you can expect:

• Your sales typically need to be over $50,000.
• The gross margin should be 20% or more.
• Your customer must be creditworthy since your ability to secure PO financing largely depends on their ability to pay for the delivered order.
• The order must be non-cancellable.
• You need to be in good financial standing.

There are several other options to consider for managing cash flow and fulfilling orders. Common alternatives include short-term business loans, bridge loans, invoice factoring, and business credit cards. 

One standout option is Kickfurther, which offers a unique and flexible approach to inventory financing.

Kickfurther provides up to 100% funding for your inventory costs on terms that you customize. Unlike traditional financing options, Kickfurther allows you to finance your entire order without adding debt or giving up equity, enabling you to use your existing capital for growth. Here are the main benefits:

• • • No Immediate Repayments: With Kickfurther, you only start repayments when your new inventory begins selling. This flexible repayment schedule aligns with your cash flow, allowing you to manage finances more effectively.
    • Non-Dilutive: Kickfurther doesn’t take equity in exchange for funding, so you retain full ownership of your business.
    • Not a Debt: Kickfurther is not a loan, meaning it doesn’t add debt to your balance sheet. This is particularly advantageous if you’re seeking venture capital or planning a sale, as it won’t lower your business’s valuation.
    • Quick Access: When your supplier payments are due, Kickfurther can fund your entire order, ensuring you have the capital when you need it most.

Kickfurther partners with brands that have achieved at least $150,000 in revenue over the trailing 12 months. While you do not need to have been in business for a full 12 months, we will assess a snapshot of your revenue over this period.

During the application process, we evaluate your account statements to calculate your trailing 12-month revenue. Kickfurther defines this revenue as your net sales, which is your business’s gross sales minus returns, fees, allowances, and discounts.

Kickfurther empowers you to control your business finances while covering your most significant expense—inventory. By freeing up capital tied to inventory costs, you can reinvest in other areas like product development, advertising, or expanding your team, driving further growth for your business.

Join Kickfurther today and set your business up for success.