Purchase Order Financing

Purchase order financing is a unique form of financing that can be utilized very profitably. It essentially makes it possible to handle orders that otherwise would have not been financially possible or responsible to take on. This means that Purchase order financing or PO financing increases a businesses ability to make sales and thus make profits.

It also has positive affects on a business’s cash flows. A common situation for a business that seeks out PO funding is their suppliers want them to pay COD but their customers want 30 day terms or longer. We have seen businesses that regularly wait 180 days from the time they pay suppliers to the time they get paid from their customers. Purchase Order financing can help manage cash flow in situations like this. It can also be used to finance business growth. When demand is high businesses can have trouble financing sales growth. PO financing will fund the projects so that your company does not have to turn down business, helping your top and bottom lines. This is why PO financing can be a very profitable form of financing.

How does it work?

A purchase order financing arrangement starts with an agreement to buy usually in the form of a purchase order from a customer. After this agreement is made, the PO financing company will pay the cost of producing the goods. Once the goods are shipped and accepted an invoice is sent to the end customer. The invoice is paid directly to the PO financing company, and they take out the amount they advanced along with any fees and return the rest as profit to their client.

Purchase order financing is ideal for Small to mid-sized businesses for many reasons. It is ideal for growth as outlined above but it is also a widely accessible source of funds; deals are rarely denied based on credit history. This is essential as bank loans are currently very difficult to qualify for. PO financing is also fast source of funding compared to bank loans. If a large purchase order comes in, there will not be time to wait and see if financing is available; PO funding companies are very responsive in that respect and can react quickly to new deals.

However purchase order financing is not for every business type. It is generally used by manufactures, wholesalers, and distributors. It usually cannot be used at the retail level or for service based businesses (B2B services could look to factoring). Purchase order financing is also not well suited for businesses with low margins. The cost of capital in these arrangements is high and if margins are too low then it will not make financial sense to utilize this form of financing.