Purchase order financing

What is Purchase Order Financing?

Purchase order financing is a funding option for businesses that need cash to fulfill customer orders. In this financial arrangement, a financing company pays your suppliers for the goods you need to complete an order. This way, your business doesn't have to deplete cash reserves.

How Does Purchase Order Financing Work?

A company receives a large purchase order from a client but lacks the funds to produce the product. The company turns to a purchase order financing firm which pays the suppliers directly. Once the goods are delivered and the client pays, the financing company takes its fees and the remaining balance is paid to the business.

Benefits of Purchase Order Financing

This finance tool is great for companies that have more orders than they can fill due to cash flow issues. It allows businesses to grow without needing traditional loans or capital. Businesses can accept larger orders and ensure timely delivery to customers.

Is Purchase Order Financing Right for My Business?

If your business often deals with cash flow challenges when taking large orders, purchase order financing could be suitable. This option is especially helpful for small to mid-sized companies that may not have access to other types of lending.

Understanding the Costs

While purchase order financing provides quick access to capital, it comes at a cost. Fees can vary but typically include a percentage of the financed amount. Companies must weigh these costs against the benefits of fulfilling larger orders and growing their business.

Relation to Financial Factoring

Although related, purchase order financing is different from financial factoring. Factoring involves selling your receivables at a discount, whereas purchase order financing is all about securing funds to pay suppliers before an order is fulfilled.

How to Get Started

To begin with purchase order financing, you'll need to provide your financing partner with details about the order, your customer, and your supplier. This ensures they understand the risk and can provide the funds required to move forward.