If you’ve never heard of purchase order financing, you don’t know what your business has been missing. But even if you have heard of this flexible financing tool, there’s probably a lot of techniques that you haven’t considered. PO financing is one of the best types of alternative financing for small businesses, but it’s also frequently underestimated and underused. In this article, you’re going to learn the answers to FAQs about purchase order financing and pick up some great tips along the way.
What Is Purchase Order Financing?
PO financing is a type of financing that uses purchase orders to coordinate product deliveries to your customers. Unlike what you’ve probably heard, PO financing isn’t a loan or a cash advance. In fact, your business doesn’t receive capital from this transaction at all. If that’s the case, then why would you want to use this option?
The reason is that PO financing ensures your clients receive the products they need, even if your business is still getting started or low on working capital. It’s a way of managing your cash flow wisely by limiting the amount of money you have to spend on inventory.
What Do Purchase Order Financing Terms Mean?
There are several terms to understand in the PO financing agreement. The borrower, or seller, is your business. The purchase order lender is the financing company. The supplier is the business that makes the products your customers need. The third-party delivery company is the business hired by the financing company to deliver the products.
How Does PO Financing Work?
Imagine two scenarios involving a startup business. The first one is a business that doesn’t have purchase order financing. This company can only afford to buy small amounts of inventory, so it can’t carry many different products. It gets large orders from several clients at the same time, but there’s no way it can buy enough inventory to cover all three orders. The only options are to ask customers to wait a while to get their products or to turn one of the clients away.
Company B is in the same startup situation, but it does have purchase order financing. When the three large orders come in, this company understands that it doesn’t have sufficient funds or inventory available. So it turns to its PO financing partner for help, submitting the purchase orders. The financing partner writes a check to the suppliers to get the right products immediately, and then coordinates delivery directly to the customers.
Everyone is happy: the clients because they get their products, the financing partner because it makes a small commission, and your business because you don’t have to turn away any customers.