Purchase Order Financing
Business ventures frequently encounter unstable and intermittent cash flows. This is where Purchase Order Financing hops in with the potential to reverse the adverse repercussions of inadequate cash reserves on trading. The cash flow problem is often experienced by small business owners. Cash flow management is rarely smooth when a business is trying to establish its identity in a new market.
When a business receives orders that are larger than expected, there may be times when:
- It does not have the required amount of cash to purchase inventory and/or deliver products.
- Orders are not submitted by the customer in a consistent manner — either they seem to come all at once, or not at all.
- It can get tricky to maintain balance in the initial and overburdened “peak” of newer businesses.
Basically, if you have a lot of orders to fill, you require a lot of funding to pay your suppliers.
The consequence of not issuing Purchase-order financing?
A business either has to rely on a term loan or turn down the order which means shooing away a good business opportunity. Turning down orders can limit the growth and prove suicidal for a business. Paying loan installments and issuing constant bank loans can also demonstrate the same effect.
How Purchase Order Financing Resolves Low Cash Troubles For A Business?
Purchase order financing is a funding tool for product-supplying businesses. It is crafted ingeniously to solve this particular problem of low business cash reserve. If a company is unable to fulfill customer orders on its own, funding support can aid it to deliver the required outputs.
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Purchase order (PO) financing works by having a PO lender pay your supplier directly to initiate the manufacture and successful delivery of goods to your end customers. It’s the type of financing you can obtain before any products are delivered and your invoice is deemed due. If you need financing after goods are delivered and your bill is due, you should investigate invoice factoring instead. With purchase order financing, the business seeking funding must sell tangible goods, typically as a re seller between contract manufacturers and end users.
How Does Purchase Order Financing Work?
There are four entities involved in the process of purchase order financing: the finance seeking company, a PO lender, the supplier, and the end customer. A purchase order financing company becomes involved once a company realizes it needs additional resources to fulfill a large order.
- A business company evaluates an order to be way overhead for their business expenditure. It gets in touch with the supplier for an invoice.
- The supplier provides the company with an invoiced estimate for the cost of the order to be supplied.
- The company applies for purchase order financing from a PO company.
- The supplier receives payment from the PO company and delivers the product to the customer directly.
- The customer either pays to the business company or to the PO financing company, depending on the structure of the deal.
- A small sum of the profit is deducted by the PO company as their fees.
The Benefits You Get
- PO financing often works best for start-up owners who find it tough to arrange adequate cash for fulfilling their orders. When such an owner finds it hard to qualify for loans, PO financing helps him establish a fruitful track record in the market.
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- Rather than depending on the personal or business credit record for approval, the PO financing company inspects the creditworthiness of the business and supplier precisely to determine whether funding is worthwhile. This way, smaller, newer businesses can piggyback on the established history of larger and well-financed companies with the only requirement being able to convince them in funding their order in the first place.
- PO financing surrogates the funds that a business requires to fulfill an order. The biggest merit of the system is that it helps them avoid unnecessary spending. Since the financing is provided directly to the supplier and is used to complete the delivery of the customer, the business is able to maintain reputable trustworthiness.
- The flexibility in the funds provided by the PO company is another bonus for small businesses. The PO financing company covers the whole cost of the order and as purchase order financing isn’t a loan, the money can be refunded in a single lump-sum amount.
Is Purchase Order Financing Reliable and Safe?
Any business that requires immediate financing to fulfill an order can issue purchase order financing. The type of business can be wholesaler, retail, distributor, import-export, start-up, etc. However, the following measures are recommended for business owners to issue a purchase order financing:
- Apply when the order is large and the profit margin is huge. For small profit margins, PO financing is not suggested. Not to mention it will be difficult to get approval for it if the profit margin is small.
- Both the customer and the supplier are credible. Don’t issue a purchase order financing for customers that are new in the market. Take precautions while issuing a PO for overseas customers too. No one likes a delay in payment.
- The supplier is renowned or well-established. The creditworthiness of the supplier matters the most for a PO financing company. Don’t hesitate to change an old supplier if he cannot get your PO financing approved.
- Government orders are safe. It is fruitful to issue purchase order financing to fulfill government orders.
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A purchase order financing issued at the right time can accelerate business growth. In-depth, there are many pros of purchase order financing with the best one being it can be issued easily. Purchase order financing is not to be confused with other funding solutions like invoice financing and term-loan financing. Purchase order financing differs from them at the transfer point of money. While the money is transferred to the business company before the order is supplied in other funding options, in PO the money is transferred to the business company after the fulfillment of the order. Some measures are likely to be taken into consideration to stay safe in PO financing but noticing the benefits, it is definitely worthwhile for new businesses.