Purchase Order Financing

Purchase Order Financing (PO Financing) is a specialized form of short-term business financing that helps companies fulfill customer orders when they lack the necessary funds or credit to do so on their own. This type of financing is particularly useful for businesses that face cash flow constraints, seasonal demand fluctuations, or rapid growth scenarios.

Here’s how purchase order financing works:

Customer Order: A business receives a purchase order (PO) from a customer for goods or products they want to purchase. This PO outlines the specific products, quantities, and delivery terms.

Lack of Funds: The business may not have sufficient capital to purchase the necessary inventory or materials to fulfill the order. This is a common challenge for small or growing companies.

PO Financing Application: The business applies for purchase order financing with a PO financing company or lender. The lender evaluates the purchase order, the creditworthiness of the customer who issued it, and the business’s ability to fulfill the order.

Approval and Funding: If approved, the lender provides the business with a line of credit or loan to cover the cost of purchasing the necessary inventory or materials to fulfill the customer’s order. This financing typically covers the cost of goods and related expenses directly tied to fulfilling the order.

Purchase of Goods: With the funds from the lender, the business can purchase the required inventory or materials from suppliers and manufacturers.

Order Fulfillment: The business then fulfills the customer’s order, which may involve manufacturing, packaging, and shipping the products.

Invoice Generation: After the order is fulfilled, the business sends an invoice to the customer as usual.

Customer Payment: When the customer pays the invoice, the business receives payment and repays the purchase order financing company, along with any agreed-upon fees or interest. Some PO financing companies and lenders will require your customer pay them directly. This can relieve the burden of chasing payments and managing cash flow to pay the lender back after payment is received from your customer.

Key points to note about purchase order financing:

• It is typically used for fulfilling specific, confirmed purchase orders and is not a long-term financing solution.
• PO financing is based on the creditworthiness of the customer who placed the order, as the lender relies on the expectation that the customer will pay the invoice. Personal or business credit history is rarely considered making PO financing a valuable tool for start-ups and early stage companies.
• It is suitable for businesses that have large orders but insufficient working capital to fulfill them.
• The fees and interest rates associated with PO financing can be relatively high due to the short-term and riskier nature of the financing.
• PO financing is distinct from traditional business loans or lines of credit, as it is focused on specific orders and inventory financing rather than general working capital needs.

Overall, purchase order financing can be a valuable tool for businesses that need to bridge the gap between receiving a large order and generating the necessary funds to fulfill it. It enables businesses to take advantage of growth opportunities without straining their cash flow.

If you would like us to review any active purchase orders for financing you can give us a call at (843) 790-3661, fill out the form on the Homepage or book some time on my calendar that’s convenient for you. Regular business hours are Monday through Friday from 8:00 am to 6:00 pm Eastern Time. Other times by appointment only.