Purchase order financing is a form of short-term funding that provides the cash companies need to pay their suppliers up-front for a customer order. Also sometimes called “P.O. financing,” the advance funding of purchase orders is an effective tool for business owners who don’t want to turn down a customer request because they lack the cash to fulfill it. Purchase order financing enables companies to handle big orders, enhance customer and supplier relationships, and improve their order volume.
How Does Purchase Order Financing Work?
Let’s say a customer places a large order. After checking with your supplier, you realize you don’t have enough cash on hand to fulfill the order. You review your options and ultimately decide to give purchase order financing a try.
Here’s what happens next:
- You reach out to the PO financing lender, sending along the purchase order itself and your supplier’s estimate.
- Assuming a provider approves you for financing, the provider pays your supplier and your order gets filled.
- The supplier sends the products to the customer.
- You then invoice your customer for the goods.
- The customer sends their payment directly to the financing company.
- After deducting their fees—which can be as high as 6% each month—the financing company sends you the remaining balance.
There are a lot of moving parts in these transactions.
What happens if your supplier ends up taking a lot longer than they predicted to fill an order? Will your customers still want the goods from you—or will they turn to one of your competitors? In the event they still want to do business, you may end up owing the financing company more interest as time goes on, depending on the terms of your contract. You may also have to offer your customers additional payment discounts to keep them happy.