Purchase order financing
Scarcity of working capital and cash flow gap will never be a hindrance in your business’ growth when we are by your side.
What is purchase order financing?
Purchase order financing, often known as PO financing, is an immediate finance option used by various businesses to get access to capital required for funding their projects. It can be termed as a short-term commercial factoring service that provides capital to the suppliers when they seem unable to take up or complete any project due to lack of funds.
It is an extremely flexible method of financing the purchase or production of goods required to work on large orders from creditworthy retailers. It enables the companies to take up big orders, improve their customer-buyer relationship, and enlarge their order volume. However, it is to be kept in mind that purchase order financing can not be used as a source of mobilization money to perform a service contract.
Only companies who sell finished products, be it business-to-business customers or business-to-government customers, are eligible for this finance option. This implies that the suppliers of raw materials or semi-finished goods will not be the beneficiary of this financing system.
More about purchase order financing
There are slight differences between purchase order factoring companies and financing companies. For instance, companies that apply for purchase order financing have a different form of cash flow need, as compared to that of the companies who have applied for factoring.
The companies applying for factoring services need the funding to ensure that the cash keeps coming during the thirty to sixty days period between the time they deliver the products and when they get paid by the customer. On the other hand, the companies using purchase order financing require the cash upfront to complete the client’s work.
To sum up, factoring funds the customer invoice, whereas purchase order financing funds the customer order.
There are chances that the client may need just a portion of the expense to be financed, but the provision even supports the ones who might end up needing 100 percent of the invoice money to be financed to meet the essential requirements.
Meet large, bulk orders without compromising on quality
Reasons to choose our factoring services
Help you build relationships
Not a loan
How does purchase order financing work?
There are four parties involved in the purchase order financing; your business, supplier, customer, and us (the purchase order factoring companies).
Let us suppose that your company has received a pretty big order you want to take up, and you don’t have sufficient funds to get the production goods. What happens is that your company takes the order from the customer.
We make payment to the supplier for the goods that the purchase order factoring companies (we) must purchase for completion of the order. Later, we collect payment from your customer and pay your company the customer invoice amount, excluding the fees.
The process of purchase order financing is quite simple. Here is an example depicting the process of how purchasing order financing works:
- Purchase order: Interested companies place orders by getting the purchasing order issued. The company estimates the cost involved once the order is given to them. To meet the working capital gap, the company decides to apply for purchase order financing and approaches a factoring company.
- Verification and payment: The purchase order factoring company verifies the authenticity of the business and invoice and pays the said amount to the supplier. The supplier delivers the raw product to the company so that the final product is manufactured.
- Issue customer invoices: After shipment, the company issues invoices, and on the decided date, the customer pays the due amount to the purchase order financing company.
- Payment of remaining amount: Once the payment is received, the financier pays the rest of the invoice money to the company after deducting the fee for the factoring services it provided.
Which business should consider using purchasing order financing?
The business entities which this system will most benefit are:
- Importer of finished goods
- Exporter of finished goods
- Outsourced manufacturers
- Government contractors
- Businesses with credit score
How does purchase order financing help you?
- Money: It provides the SMEs with adequate amounts of money, thus helping to boost their operations.
- Helps meet big orders: It proves to be of utmost importance in meeting big orders without any compromise in the quality.
- Expansion of business: It helps in retaining bigger clients and also results in the expansion of the business operation.
- No personal guarantee required: There isn’t any requirement to provide a personal guarantee of any sort so as to get the business fund.
- Flexible: It is relatively flexible compared to the business loans, and businesses can raise to even 100 percent of their order amount by meeting essential requirements.
- Strengthen supply chain: It enables the businesses to strengthen the supply chain by providing funds to the suppliers.