Purchase Order Financing (PO Financing) is a funding option for businesses that need cash to fill single or multiple customer orders. In many companies, cash flow problems exist. There will be times where there is not enough money available to cover the costs of doing business. As a result, there may be an order from a client that you may not be able to fulfill due to a lack of cash. A company may not be able to afford the supplies necessary to meet the client’s particular needs. Having to turn the order down would mean a loss of revenue and perhaps even a tarnished reputation.
If word gets around that your company is turning away businesses because you can’t afford to complete jobs, you will lose customer trust. Groups that consider giving such company their business will likely think twice. Therefore, to avoid such a scenario, it is imperative that companies find the money that they need. For some companies, purchase order financing is a great way to go.
Purchase Order Financing (or PO Financing) involves one company paying the supplier of another company, for goods that have been ordered to fulfill a job for a customer. PO Financing is an advance. It may not be for the entire amount of the supplies, but it will cover a large portion of it. In some cases, companies can qualify for 100% financing.
Options in a Purchase Order Financing
There are two options you choose from in a purchase order financing. First, the purchase order finance company will collect the invoice from the end customer. The purchase order finance company then makes its money by charging the company in need of funds various fees. These fees are taken out of the collected invoice. The remaining amount is returned to the company.
The second option is for the purchase order financing company to open up a line of credit with the supplier. The line of credit will be opened in their name and backed by them. With a line of credit, businesses with poor credit or few assets get the supplies they need.
What are the Advantages of a Purchase Order Financing?
It is pretty easy to qualify for a purchase order financing; much more accessible than bank financing. A purchase order financing company does not require a company to have stellar credit. What is essential is the creditworthiness of the client who created the purchase order. If this person has a strong credit history, then purchase order financing is pretty easy. Many companies will require that the client be a commercial one or a government agency. There might also be other requirements. For example, the company may need to be profitable or earn so much in sales each month. The conditions will likely differ based on the financier.
Unlike bank financing lenders, purchase order financing hinges mostly on the financial strength and creditworthiness of the company who has placed an order with a particular business, and not on the business itself. This makes it a viable option for new businesses and those with average credit.
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