How does Purchase Order (PO) Financing Work in Canada?

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How does Purchase Order (PO) Financing Work in Canada?

A growing business sometimes is short on cash flow and may need help with financing when a substantial order comes in. PO financing is a process where a lender will pay your suppliers for up to 100% of the value of your purchase order. This can be particularly helpful when your business grows quickly, but your cash flow has not caught up yet.

The following article will walk you through PO financing in Canada, looking at how it works and what some possible alternatives are.

  • What are the steps in Financing a PO?
  • What are the Advantages of PO Financing?
  • What are the Disadvantages of PO Financing?
  • What to look for in a PO Financing Provider?
  • Alternatives to PO Financing
  • Final Thoughts

What are the Steps in Financing a PO?

Customer Places Order

The customer will place their order with you. This is where the decision would be made to obtain PO financing.

Apply for Financing

You apply for PO financing with your chosen provider. Some institutions specialize in business capital solutions in Canada, with PO financing being an area of expertise.

PO Financing Company Pays the Supplier

Once the PO financing company has approved you, they will issue a credit note to your supplier or pay the supplier directly for the PO.

Supplier fills the Order

According to skutopia the supplier fulfills your order(s). Whatever step you have in delivering goods occurs, you deliver your customer’s order.

Customer is Invoiced

You issue your customer an invoice with instructions to have the customer pay the financing company. Typically, 90-day terms are offered to the customer.

Customer pays the Invoice

The customer pays the Invoice that was issued, and the PO financing company receives the funds.

PO Company Gives You the Amount of Invoice, Less Fee

The PO financing company sends you the funds they collected, less their fee.

What are the Advantages of PO Financing?

PO financing in Canada doesn’t require a business to have good credit. PO financing relies on the credit standing of your customers, allowing start-ups and businesses with bad credit or no credit to secure funding.

Given this financing structure, this type of liability does not appear on a company’s balance sheet. Because this isn’t a structured loan, there is no need to budget for regular installment payments.

Accessing PO financing allows you to scale your business quickly, freeing you up to take on larger and larger orders without worrying about how you will pay for them. Proactively securing financing and freeing up cash flow allows you to continue to invest in your business and gives you a reserve for anything unforeseen that may come up during the fulfillment process.

What are the Disadvantages of PO Financing?

PO Financing can be expensive, typically between 2% and 6% of the total value of the purchase order. Also, this relies on the credit worthiness of your customers. High-profit margins are also required to qualify for PO financing. Newer businesses just starting may not be showing profitability at those levels yet.

It can be challenging to lose control of the process, as the financing company now becomes responsible for paying your suppliers and collecting your customer’s funds. Building relationships with your customers is meaningful, and it can be hard to manage the invoice collection outside your business.

What to look for in a PO Financing Provider?

In your search for selecting a PO financing provider, it is essential to partner with someone who will be a good fit for your business. It will be necessary to understand how many transactions they have dealt with and how experienced is the team you will be working with. You will also need to know if they intend to do credit checks with your customers and what kind of service they provide. You will want to partner with a reputable provider who will maintain the relationship you have built with your customer.

An important part of the service provided by a PO financing provider is the platform you use to interact with them. Is it an easy-to-use online service? How simple is it to talk to someone? What is the standard turnaround time for loans and customer service inquiries? It is crucial to choose a company that aligns with how you run your business.

Pro Tip: Look for online reviews to give you a sense of how a provider stacks up in the marketplace.

What are Alternatives to PO Financing?

While PO financing is a great option, there are other choices bridging gaps in capital for your business in Canada. Some preferences include short-term business loans, Business Credit Cards, and Invoice Factoring.

Short Term Business Loans

Short-Term Business Loans are quick and easy ways to secure financing. Typically, they are done online and can be approved within a business day. Be mindful of what interest rate you will be able to secure and choose a provider with a reputation for good service.

Business Credit Card

Credit Cards are an excellent option for financing if your suppliers accept them. They also come with rewards, low introductory rates and can come with certain levels of insurance around purchase protection and product warranty extension.

Invoice Factoring

Invoice Factoring is when you issue your customer an invoice and sell that Invoice to an invoice factoring company. They will advance you most of the amount of the Invoice. The customer pays the total invoice amount to the factoring company, and they pay you minus a fee.

Final Thoughts

PO Financing in Canada can be a great option if your business’ growth is outpacing your cash flow and can be a great way to bridge the capital gap in the short term if your credit hasn’t been established yet. It can be a significant part of your toolkit to build your business.

Keeping track of your financing deals is essential, and an excellent procurement program can help. Tradogram is an intuitive, easy-to-use, cloud-based procurement solution that can help you manage the administration of your Purchase Orders.

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