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Tata Capital > Blog > Wealth Services > How to Qualify for Purchase Order Financing?

Wealth Services

How to Qualify for Purchase Order Financing?

How to Qualify for Purchase Order Financing?

Entrepreneurs who run small businesses know the meaning of a cash crunch. But, when you have orders lined up at the start of the new financial year, but no cash to fulfil them, the frustration is at a different level. The situation can be obviously different if small business owners use purchase order funding. The fact is getting an order is the tough part; when you have secured the order win then financing will happen too.

The lack of awareness about purchase order financing has multiple implications including being forced to take high-cost loans from moneylenders, or not being able to service the order just because you cannot buy the raw materials required for order delivery. If you too want to avail purchase order funding and need to know, how this is the answer: The first thing you need to know that purchase order funding is a form of a working capital loan and can be easily taken if you meet the required eligibility criteria. You can check about eligibility criteria from financial institutions websites like Tata Capital’s website

Business History

Financial institutions who will give purchase order funding consider many key things of a borrower before giving the loan. One of the most important parameters is the track record of producing goods. Your company may be a startup, but company management must have a demonstrable track record of producing goods.

It is good if you have customer testimonials and some sort of certification to show how your business history is replete with positive value addition. Know about the different types of working capital loans by clicking here.

Buyer's Purchase Order

Every purchase order financing is ultimately due to an order placed by your buyer/client/customer. You will fulfil the order and the client will pay. Financial institutions providing you with P.O. financing will want the buyer/client to be reputable and with a good credit line. Purchase order funding route is available from NBFC’s like Tata Capital for vendors dealing with selected corporates only. They just need to have to be approved from Tata Capital. Also, the purchase order, which is the basis of the working capital loan, must be verifiable to proceed.

Suppliers Track Record

To fulfil an order, you will use suppliers to provide some of the materials. Your suppliers are your vendors. Your suppliers must really know your product and have the capability to produce it in time within your client/buyer’s terms including the deadline. Financial institutions may check if your supplier has a good business history and a good track record of producing goods. Providing this information will take you one step closer to the purchase order funding deal.

Order Profitability

The purchase order transaction is the basis of P.O. financing. The order must be able to pay all the stakeholders. For instance, an order after all expenses must be able to make a profit for all. Without a profit, a purchase order financing deal will not be done by any financial institution. The order must be a profitable one for the borrower. Do also remember finished goods are easier to finance than non-finished goods. You can know more about Tata Capital's offerings by clicking here.

All documents

For a purchase order funding transaction to work, the following documents may be required by financial lenders.

  1. A completed Purchase Order Financing application form.
  2. Your invoice to the buyer
  3. Your supplier’s invoice and information about your supplier
  4. Your purchase order (P.O.) to your supplier
  5. Evidence of profit on the transaction (gross margin)
  6. Evidence of your and your supplier's business history & track-record
  7. Your company's most recent financial documents like P&L, Balance Sheet etc.
  8. Evidence of your time frame to produce the required goods
  9. Finished goods or non-finished goods details

You can consider purchase order funding from NBFCs like Tata Capital if you need money to execute a project.