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Purchase order financing offers Canadian companies with an excellent alternative to traditional bank-based credit. With this type of funding, a company can receive cash for a purchase order (PO) to pay suppliers.
Cash flow is a problem for many companies, but particularly for startups that are not yet profitable. The old financing model involved opening up a line of credit with a bank or obtaining a traditional bank loan. Some other funding alternatives included using business credit cards or venture capital loans to keep the cash flowing.
PO financing provides quick capital
Unlike many other traditional types of financing, purchase order funding request usually receive fast pre-approval and move on to the receivable financing portion.
Learn more about the purchase order qualification list
Traditional financing is difficult in current situation
The worldwide economic situation is still having an influence on financial markets. Banks continue to have large quantities of bad debt to deal with and they are making it very difficult for businesses to obtain common types of financing.
Many companies simply cannot qualify for loans or credit lines because the banks are minimizing the amount of risk that they are taking on at the current time. Because the problem is so deeply entrenched and widespread, many analysts fear it could be several years, at least before lending begins to return to normal. Additionally, they remain doubtful that we will see anything like the easy credit environment that existed during the heyday of the boom period before the crash.
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Turning toward PO financing
Among the available alternatives to traditional bank financing are options like purchase order funding. Unlike a loan, credit line or credit card, PO financing does not involve taking on new debt.
The financing company, also known as a “factor,” evaluates and advances funds against the purchase order on behalf of the client. In many cases, companies need extra capital in order to fulfill their purchase orders.
They need to buy raw materials, pay workers and pay for utilities among other expenses. A financing provider can buy the purchase order and collect from the customer providing the client with the needed operating cash.
In Canada, the financing provider will typically offer cash for up to 75 percent of the value of the purchase order. After collecting the payment from the order, the provider advances the remainder of the money minus their discount to the client. The discount rates for purchase order factoring in Canada can be low as 2.5% although 2.5% to 15% is the average range depending on the length of time and type of goods that are being financed.
PO financing is different from lending
While on the surface it may seem like the purchase order funds are loans, it is actually the orders themselves that are types of conditional debts. If the company that receives the order fulfills its part of the contract, then the customer must pay the invoice amount.
The financier actually buys part of this order and takes on most or all of the collection duties. The client sells the contract (or assigns the proceeds) and the payment or discount only occurs after the buyer/customer pays in full.
Benefits of purchase order financing
PO funding provides a number of solid benefits especially when compared to traditional bank financing.
How to qualify for purchase order financing
Qualifying for PO financing mainly involves the client’s customer rather than the client. The customer who issues the purchase order must have a good credit record. Large stable companies and government agencies are typically the best customers for this type of financing because it is likely that they will be able to pay their bills.
In some cases, Canadian companies may need to provide collateral or other types of security to reduce risk for the financing provider.
Finding purchase order financing companies
PO financing providers can vary quite widely in the types of terms and service that they provide. While the cost is certainly one of the most important considerations when choosing a funding company, other factors are also important.
For example, what types of qualifications does the company require? Some financing providers will demand that clients have a minimum amount of monthly sales in order to qualify.
Others may set profit margin limits since the client must have a wide profit margin to utilize this type of funding safely. For example, a PO factoring company may require that clients have a gross profit of at least 20 percent.
Check to see how quickly the company can provide funds when needed. Also, look for credentials and recommendations from past clients
The Internet is a great place to shop around for and to compare purchase order financing companies. Some sites will allow you to compare rates offered by different providers. Usually they will provide other information including qualification criteria.
Generally, it is a good idea to build up a relationship with a stable company since you want to ensure that you will have access to funding when needed. A little research on the firm can help you in making such judgments.
Check the company’s “About Us” section on their website. How long have they been in business and how extensive are they in terms of geographical coverage?
Another important consideration is customer service. Does the company perform as advertised? If possible, try to find someone else who has used the company’s services and is willing to provide a recommendation.
Purchase order financing offers a great alternative to traditional bank and other financing options for Canadian companies. With this type of financing, the client sells their purchase orders for cash to keep operations moving smoothly.
The financing provider then is responsible for collecting payment for the purchase order. The funds provided are not a loan, so they do not negatively impact the company’s risk profile.
The cash is available quick and it easier to obtain when compared to traditional bank financing. Indeed, in today’s economic environment, credit lines and banks loans are difficult to obtain especially for small businesses.
Companies with creditworthy customers can qualify for purchase order financing. Generally, they also should have wide profit margins. With bank financing expected to remain tight in the coming years, PO funding will continue to provide an excellent alternative for Canadian businesses.