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Purchase Order Finance

Supplier: AR Cash Flow

Purchase order finance is one of the best ways for a business to get almost instant access to funds. Every business faces a cash crunch at some time or ...

Price Guide: POA

Purchase order finance is one of the best ways for a business to get almost instant access to funds.

Every business faces a cash crunch at some time or other, particularly when suppliers are waiting to be paid, and there is no way you can get your own accounts receivables within the next thirty days. With purchase order financing, you can leverage your purchase orders for either cash or credit advances to your suppliers. The best part of this is, you can go ahead and accept new orders even if your cash flow is low, because purchase order financing will fund your operations. Most of all, the biggest advantage is that your business can now grow without worrying about operational costs.

How Purchase Order Finance Works

You can view purchase order finance as an advance receipt of funds against purchase orders. The purchase order finance company pays your supplier for the raw material you need to buy to produce the goods against a purchase order. When your invoice is due for payment from your customer, the PO finance company receives this payment in lieu of the funds they gave you, and charge you a fee for the service. In effect, instead of getting the order, paying the supplier and delivering the goods to your customer and then finally waiting to receive your payment, you can now receive your payment along with your purchase order.

PO finance is easy to use. The work flow can be summarized as follows:

  • You receive a purchase order from your customer.
  • The purchase order finance company issues a letter of credit or pays cash to your supplier.
  • Your supplier then manufactures or ships your goods.
  • Your supplier then delivers your goods directly to your customer.
  • Your client settles the invoice to the purchase order finance company and completes the transaction.

For a business, the benefits of purchase order financing are:

  • It is a no-debt finance solution which funds your business from its own purchase orders.
  • You don’t have to go through a bank loan application and the possibility of rejection.
  • Purchase order finance gives you cash savings that you can use.
  • You no longer have to refuse orders just because you don’t have the funds to take care of the operating costs.
  • You can accept large orders, growing your company since you have the money to look after wages, materials, etc.
  • You don’t have to worry about collections, since the purchase order finance company takes care of it.
  • Your credit standing does not matter; instead, your client’s creditworthiness is more important.

As you can see, purchase order finance is the ideal funding option for companies that are keen to grow their business. Compared to bank finance, PO finance is easy to qualify for and does not impose restraints.

Just about any kind of business can benefit from this financing method using it as a tool to enable them realize their dreams of rapid growth and profits. In fact, many businesses combine purchase order finance and invoice factoring, to enjoy the advantage of bringing down the total cost of the transaction.