What is Purchase Order Financing?
How It Works & PO Funding Benefits
Purchase order financing is a funding option for businesses that need cash to fill single or multiple customer orders. In many businesses cash flow problems exist. There will be times where there is simply not enough money available to cover the costs of doing business. As a result, there may be an order from a client that isn’t able to be fulfilled due to a lack of cash. A company may not be able to afford the supplies necessary to meet the client’s particular needs. Having to turn the order down would obviously mean loss of revenue and perhaps even a tarnished reputation.
If word gets around that a company is turning away business because they can’t afford to complete jobs, customer trust is diminished. Groups that considered giving that company their business will likely think twice. Therefore, to avoid such scenarios, it is imperative that businesses find the money that they need. For some companies, purchase order financing is a great way to go.
Purchase order financing involves one company paying the supplier of another company, for goods that have been ordered to fulfill a job for a customer. This is an advance and may not be for the entire amount of the supplies, but it will cover a large portion of it. In some cases, companies can qualify for 100% financing. The purchase order finance company will then collect the invoice from the end customer. The purchase order finance company makes their money by charging the company in need of funds various fees. These fees are taken out of the collected invoice. The remaining amount is returned to the company.
A second option is for the purchase order financing company to open up a line of credit with the supplier. The line of credit will be opened in their name and backed by them. This allows businesses with poor credit or few assets to get the supplies that they need.
Purchase order financing can be quite advantageous. It is pretty easy to qualify for and much easier than bank financing. Also, it does not require a company to have stellar credit. What is important is the creditworthiness of the client who has created the purchase order. If this person has a strong credit history, then purchase order financing is pretty easy. Many companies will require that the client be a commercial one or a government agency. There might also be other requirements. For example, the company may need to be profitable or earn so much in sales each month. The requirements will likely differ based on the financier.
Unlike bank financing lenders, purchase order financing hinges mostly on the financial strength and creditworthiness of the company who has placed an order with a particular business, and not on the business itself. This makes it a viable option for new businesses and those with average credit.