One of the challenges businesses face is ensuring you have the financing needed to fill orders. If you are a new business, or one that is expanding, you may need additional financing to help meet the demands of your customers. One possible solution is purchase order financing.
What is purchase order financing?
Purchase order financing provides financing to a company by using purchase orders as collateral. Most often, the purchase order financing company pays the manufacturer or supplier, who then sends the products to the customers. The customer then pays the financing company directly. After payment and any additional fees are deducted, any remaining balance from the customer is then sent to your organization.
The purchase order financing process
- Your company receives an order but you do not have the funds to fill it.
- You provide the order details to the supplier and apply for purchase order financing.
- The purchase order financing company pays the supplier.
- The supplier fills the order.
- You invoice the customer for the products.
- The customer pays the invoice to the purchase order financing company.
- The purchase order financing company deducts their payment (what was sent to the supplier on your behalf) and fees, then sends the rest to you.
The pros and cons of purchase order financing
Some of the benefits of this type of financing include:
- It is easier to get compared to a traditional loan.
- Guarantees are usually not required.
- Financing is more flexible compared to a business loan.
Some of the drawbacks of this type of financing include:
- This is typically a short-term solution.
- This type of financing can only be used to manufacture and supply goods to customers.
Purchase order financing can be an effective way for your business to fill orders to customers so you can continue to operate efficiently. By working with the financing company, you can make sure your customers are happy and, before you know it, you will be ready to take your business to the next level.