A Strategic Guide to Purchase Order Financing for Startups

As a startup, you’re no stranger to the constant struggle for capital—you know the financial roadblocks all too well. And with traditional funding options posing more barriers than solutions, it often feels like you’re hitting dead ends at every turn.

But there’s a less familiar path that could be your solution: purchase order financing. It’s a practical solution to the cash flow challenges many new and small businesses face, especially when dealing with large orders that could propel your business forward.

Let’s explore the ins and outs of purchase order financing—how it works, its benefits, and how you can leverage it effectively for your business.

Understanding Purchase Order Financing for Startups

Getting a loan may seem like a good idea, but traditional lending avenues often demand collateral or an established credit history—two things startups may not always have. This is where purchase order financing comes in.

Purchase order financing is a type of funding where a third-party company or individual provides the necessary capital to a business to fulfill a specific customer order. Instead of relying on the business’s own funds or traditional loans, the provider advances the money needed to produce or purchase the goods required to fulfill the order. Once the order is completed and invoiced, the fund provider is repaid along with a fee, and any remaining profits go to the business. It’s a useful option for businesses facing cash flow constraints or large orders they can’t fulfill on their own.

How Does Purchase Order Financing Work?

Purchase order financing involves multiple parties throughout the process; it entails the participation of the following:

• The company – This is the business seeking financing to fulfill a purchase order.
• Purchase order financing provider – The entity offering the financing. This provider validates your purchase order and disburses funds to the supplier.
• Supplier – The company responsible for supplying or manufacturing the goods that you intend to resell or distribute. The supplier receives payment for its goods directly from the purchase order financing provider.
• Customer – Those seeking to purchase goods from the company. In a purchase order financing setup, once your customer receives the goods, they typically remit payment directly to the financing provider.

Here’s a breakdown of the process:

1. Get a purchase order (PO) from a customer

This is essentially a commitment from a customer to purchase goods or services from your business. It outlines the order’s details, such as quantity, price, and delivery terms.

1. Assess the costs and potential profits

Once you have the PO, it’s time to evaluate the financial implications. Calculate the costs involved in fulfilling the order, including production, materials, labor, and any other expenses. Compare these costs to the potential profits to ensure the order is financially viable for your business.

1. Apply for financing with a lender

If you lack cash or inventory to fulfill the order, apply for purchase order financing with a financing company, providing details of the purchase order and supplier costs.

1. Get approval and receive funding 

The lender will review your application and assess the risk involved. The financing company may approve funding up to 100% of the supplier’s costs based on various factors like your business qualifications and customer creditworthiness.

1. Use the funds to fulfill the order

With funding secured, you can now proceed to fulfill the purchase order. The financing company pays your supplier directly to manufacture and deliver the goods needed to fulfill the order.

Payment to the supplier can be made through a letter of credit, which guarantees payment upon satisfying certain conditions such as proof of shipment.

1. Deliver the goods or services

Once the order is ready, it’s time to deliver the goods or services to the customer according to the terms outlined in the purchase order. This may involve shipping the products or providing the agreed-upon services.

1. Invoice the customer

After delivery, you’ll send an invoice to the customer requesting payment for the goods or services provided and send a copy of the invoice to the financing company. The invoice should include details such as the total amount due, payment terms, and any applicable taxes or fees. 

1. Keep the profits

The customer pays the financing company directly for the invoice amount. The financing company deducts its fees from the payment received from the customer and transfers the remaining balance to your business.

Costs, Requirements, and Other Considerations

Before committing to purchase order funding, it’s important to understand the associated costs, requirements, and other factors that may impact your decision:

Costs

Purchase order financing typically comes with fees and interest rates that vary depending on the financing company and the specifics of your arrangement. Common fees include application fees, processing fees, and discount fees. 

Requirements

Financing companies may have specific requirements that businesses must meet to qualify for purchase order financing. These requirements may include a minimum order size, a minimum monthly revenue threshold, or a certain level of profitability.

Repayment Terms

Understand the repayment terms of the financing arrangement, including the repayment schedule and any penalties for late payments. It’s crucial to ensure that your business can comfortably manage the repayment obligations without causing financial strain.

Choice of Funding Company

When considering purchase order financing for your startup, reliability is key. Seek out a funding partner known for their strong reputation, transparent practices, and exceptional customer service. 

Why Kickfurther?

Choosing the right partner for purchase order financing is crucial for the success of this funding strategy. Kickfurther, a trusted, long-term growth partner, offers a unique approach to financing inventory needs, tailored for growing startups. 

What sets us apart?

• No immediate repayments. Do not pay until your product sells; you control your repayment schedule. Other providers may debit your account daily as part of a repayment schedule. Loans require repayment before your sales cycle has even begun. 
• Non-dilutive. We don’t take your equity. We do not require equity in your business to access inventory funding.
• Not a debt. This is not a loan, so it does not put debt on your books which can sometimes further constrain your working capital/access to capital and lower VC valuation.
• Quick access. You need capital when your supplier payments are due. Kickfurther can fund your entire order(s) each time you need more inventory. 

Kickfurther keeps you in control of your business; say ‘yes’ to opportunities when lightning strikes and stay ahead of demand with fast, flexible funding for up to 100% of your inventory. 

It only takes three steps to get funded at Kickfurther:

1. Create a free business account.
2. Complete the online application.
3. Review a potential deal with one of our account reps & get funded in minutes.

Get a trusted funding partner—join Kickfurther today.