Eligibility Checklist for Purchase Order Financing: What Businesses Must Know

When you have a substantial customer order and not enough working capital to fulfill it, purchase order (PO) financing could be your lifeline. PO financing provides a funding solution based on confirmed orders and can give small businesses and start-ups the ability to take larger orders and get market credibility. Below is a full eligibility checklist alongside resources and insights to help you assess your potential for PO financing, including the process to apply for start-ups, small/mid-sized businesses (SME), and government purchase order financing.

What is Purchase Order Financing?

Purchase order finance is a short-term funding solution that enables businesses to fulfill customer orders they might otherwise have to decline due to insufficient cash flow. A finance provider will advance cash directly to your suppliers to obtain the goods needed to fulfill the customer order. 

After goods are in the customer’s hands and that customer has paid, the finance company deducts the fees and returns the balance to your business. PO financing can be particularly useful for wholesalers, distributors, and resellers when completing valuable or unpredictable orders.

Who Benefits from Purchase Order Financing?

Understanding the right companies for PO financing ensures you will not waste your time submitting an application when your situation doesn’t fit. Common businesses for PO financing include:

• Distributors, traders, and wholesalers who purchase finished goods to resell.
• Start-ups and growing businesses are experiencing rapid growth and opportunity, but do not have cash reserves.
• Companies fulfilling government contracts or having public sector customer contracts, where contracts are often for large amounts and have long payment cycles.
• If you run a business where you need to pay suppliers upfront to fill confirmed orders with reputable customers, PO financing is likely a good option for you. 

Core Eligibility Criteria for Purchase Order Financing

Lenders will have a set of requirements that will help mitigate risks and set up secure processes and transactions. You need to meet these standards to receive approval:

Transaction Nature

Purchase order finance is intended only for transactions where finished, tangible products are to be resold. This type of financing does not usually apply to service industries or custom manufacturing. In addition, transactions where the sales are on consignment or guaranteed sales are generally excluded. The purchase order involved must be firm and non-cancelable, allowing lenders to have assurances that the order will be consummated without any cancellations. 

Business Profile

Lenders typically prefer to work with intermediary businesses, those who purchase products and then resell them, but there can be exceptions in certain cases. A record of two to three years in business is usually a minimum to qualify because lenders want to see an existing business with a proven history. New businesses are usually not considered, nor are businesses applying for financing on their first sale or brand new products, as they are considered to be too much of a risk.

Minimum Order and Margin Requirements

The majority of PO financing options set minimum order amounts, below which they do not finance the transaction. This amount often starts around INR 50,000 or USD 100,000; however, the amount varies, and the variations depend on the type of lender. The other aspect of this is the gross profit margin on the transaction. A lender is usually looking for a margin of at least 15 to 20 percent, since the business will need to leave enough margin to be able to cover its high financing costs, while remaining a profitable transaction overall.

Creditworthiness of Your Customer

Since PO financing is based on the customer paying, it is very important for lenders to know the end customer’s creditworthiness. They will do their own credit checks, and they also consider whether the customer has paid their suppliers on time in the past, their reputation, and the likelihood of paying on time. A customer with a poor payment history, legal issues, or a record of bankruptcy is considered an increased risk of non-payment, which can affect the approval of purchase orders.

Reliability of Your Supplier

Your suppliers are the most critical part of purchase order financing, as they are the companies that will fulfill the order from the purchase order you have. Therefore, lenders will assess whether suppliers can deliver the goods promptly. A reliable and trustworthy supplier reduces the risk associated with financing, and you are more likely to have your financing approved.

Company Financial Strength

Along with order and customer analysis, the financial strength of the borrowing company is carefully examined. Purchase order financing for startups and other businesses requires proving they have a good business reputation, providing healthy financial statements, and having a suitable credit history. It’s also important for lenders to see that there are no significant outstanding litigation or financial matters.

Location and Type 

A lot of lenders may choose to restrict their lending to businesses in Tier 1 and Tier 2 cities because those locations have better infrastructure and economic conditions. In terms of eligible business types, entrepreneurs in a variety of sectors, including manufacturing, trading, and some service-based sectors, may qualify for an application if they fit the criteria outlined in the application.

Knowing the process can better prepare you and ultimately increase the likelihood of your success. Below is a complete guide to the process of financing purchasing orders: 

• Assessing and Compiling the Required Documentation: This consists of your customer PO, supplier information, legal registrations, and financial documents.
• Submitting the Application: Make sure the correct documents are submitted, and you are ready to provide follow-up information regarding your order, customer, and supplier.
• Underwriting and Verification: The lender verifies each party’s creditworthiness and checks that the quality is acceptable across all documents.
• Disbursement and Fulfillment: If approved, funds are immediately paid to the supplier who ships the goods to your customer.
• Collection and Reconciliation: When your customer pays, the lender takes their fee and returns the remaining amount to you.

Choosing the Right PO Financing Partner

Purchase order financing provides the ability to grow—even for startups and SMEs. As your business grows by fulfilling larger orders and developing strong relationships with suppliers and customers, PO financing can enable you to grow without the capital constraints. 

Credlix is a growing leader in the PO financing space, providing fast, transparent, and digital cash to help Indian businesses scale as fast as possible. With flexible criteria, competitive rates, and friendly repayment terms, Credlix can allow you to say yes to every order and can be your financing partner for your next big growth in business.

Frequently Asked Questions (FAQs)

Q1: Who can avail of purchase order financing in India?

Companies engaged in trading, manufacturing, or services, and doing business for at least three years, with a turnover of ₹10 crore or above, situated in tier 1 or tier 2 cities, and having a decent credit history, are generally eligible.

Q2: What documents do we require for PO financing?

You will require proof of purchase orders, supplier invoices, business documents, and legal documents (GST Certificate, PAN, etc.), and 12 months of bank statements.

Q3: How quickly can businesses receive the funds using purchase order financing?

Funds can be disbursed, with digitized onboarding, within 48 hours upon approval for eligible businesses.