This tool is used when a client buys product from a manufacturer and then sells it to its customers. Purchase order financing is financing for the purchase of assets to be sold. Clients are usually required to provide 25-50% of the purchase price of goods. PO financers will provide lines to clients anywhere from 40-70% of the purchase price. The difference between the % a manufacturer requires and the amount above that a PO financer will provide can be used to purchase more inventory in certain cases.
PO financers are usually separate finance providers and require a Factoring company to also be involved so they are guaranteed payment quickly. Some lenders offer both PO and factoring.
What is PO financing?
Purchase order financing is payment made to a supplier on behalf of a buyer that has a purchase order for goods to be supplied and delivered by the supplier to the buyer’s customer. This provides businesses with the capital needed to fulfill large orders that exceed their current financial capabilities. Funding is then repaid with the proceeds from the sale after the goods are delivered to the client.
How is PO financing different from bank financing?
Banks lend money based on a borrower’s balance sheet, financial history, cash flow however purchase order financing is provided based on the profitability of a single transaction.