Purchase Order Financing: What Is It And How Does It Work?

In many cases, you may find that you do not have the funds to fulfill an order. This can be very frustrating as you try to grow your business. You may not be able to get what you need from your suppliers in order to fulfill the needs of your client. This can mean that, instead of taking on more clients, you have to wait until an order is filled in order to purchase more supplies. This is not a streamlined or efficient way of doing business. But if you canít get traditional financing and you are out of capital, what else can you do?

Purchase order financing

One of the things that many businesses do is use purchase order financing. This allows you to be approved for financing based on your credit-worthy clients, rather than on your own business credit. This means that you can get approved for financing faster (in as little as 5 to 10 days), and once you are approved, you do not usually have to apply again for financing. You can continue to use purchase order financing in conjunction with approved clients.

Hereís how purchase order financing works:

1. One of your clients makes a purchase order.
2. You get a letter of credit from the financier. This lets your suppliers know that you have the funds, covered by financing.
3. Your supplier accepts the funds from the financing and delivers what you need.
4. You can then fulfill the purchase order for your customer.
5. You provide an invoice to your client.
6. The client pays the invoice within 90 days.
7. All parties have a settled transaction to make sure everyone gets paid.

Purchase order financing allows you to still do business and get the supplies you need, even if you do not have immediate access to cash. It can also ease your cash flow situation and allow you to continue taking and filling order from your customers.

One of the biggest advantages offered by purchase order financing is the fact that once your line is established, you can continue to use the financing for new orders. With a traditional loan, you have to continually re-apply as each loan is used up. With purchase order financing, you only finance those orders as you need them, and you do not have to re-apply when you need to access your line.

Things to remember about purchase order financing

Purchase order financing can be a great tool. However, it is important to remember that it is still a financing mechanism. Someoneís credit is going to need to be checked. In this arrangement, it is not the business credit that is checked, but the credit of the clients. Only those commercial and government clients that are credit-worthy and low risk will be approved for use in the purchase order financing arrangement. This means that you need to screen clients to make sure that they are likely to pay their invoices on time.

You can use purchase order financing to fulfill large sales as well as small. However, you will still have to pay a percentage of the transaction in fees. But usually that is worth it if you can expand your business and deliver large orders.

In this economy, it is nice to know that it is still possible to get some sort of financing for your business. Some of those who are most likely to benefit from purchase order financing are distributors, resellers and wholesalers. Companies that are growing quickly are more likely to benefit as well, since purchase order financing allows them to continue to get supplies before other invoices are paid.

There are many options out there beyond traditional financing, and purchase order financing is one way to streamline your company cash flow and keep up with the needs of a rapidly growing business.