Purchase order financing
Also called: PO financing
Purchase order financing is funding that pays your supplier to fulfill a confirmed customer order when you lack the cash to produce it yourself.
Purchase order financing gives a product business the cash to pay suppliers and fill a large confirmed order it could not otherwise afford. The financing company pays the supplier directly, often by issuing a letter of credit or sending funds, so the goods get made and shipped to your customer. Once the customer is invoiced and pays, the financier collects its advance plus a fee and passes the rest to you. Approval leans heavily on the creditworthiness of your customer and the reliability of your supplier rather than on your own balance sheet, which makes it accessible to fast growing or newer companies.
This fits wholesalers, distributors, and resellers who land an order bigger than their working capital can handle and need to bridge the gap between paying for goods and getting paid. The cost is usually a fee charged on the financed amount per month, which can add up on long fulfillment cycles, so it is best for orders with healthy margins. It applies to finished goods being resold, not to manufacturing from raw materials in most cases. If your need is collecting on invoices you have already issued, invoice factoring may be a cheaper fit.
Common questions
How is PO financing different from invoice factoring?
PO financing pays your supplier before goods ship so you can fulfill an order. Factoring advances cash against invoices you have already sent to customers.
What does purchase order financing cost?
Pricing is typically a fee on the financed amount charged per month until the customer pays, so the total cost rises with longer fulfillment and payment cycles.
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