What Is Purchase Order Financing?
Purchase Order Financing is a type of commercial financing that allows a business to use the purchase order from the client as collateral to receive funding for a pre-ordered project. Small or growing businesses often will not have available funds to purchase all the materials necessary for a big job, nor can they obtain funds from a traditional financial institution based on their credit alone. The difference between PO financing and traditional bank financing is that PO financing bases its credit decision on the financial situation of your client, while a bank would only consider your finances, regardless of promising future income.
Purchase Order Financing allows a company to:
- Process large orders and expand production without depleting cash reserves
- Obtain financing for presold goods and inventory to promote business growth and opportunity
- Maintain their reputation as a business worth working with
- Continue to expand
Purchase Order Financing involves one company paying the supplier of another company for the goods necessary to fulfill a job for a customer. This advance may not be for the entire amount of the supplies, but it will cover a large portion. Sometimes, companies can qualify for 100% financing. The loan company will then collect the purchase invoice from the end customer. The purchase order finance company makes their money by charging fees to the company in need of funds. These fees are deducted from the collected invoice. The remaining balance is returned to the company.
Benefits of Purchase Order Financing
- Doesn’t add debt
- Allows for larger orders without giving up business equity
- Ensures customer deliveries arrive on time
- Provides flexible funding
- Boosts your profits
- Expands your market share
- Provides fast financing