Purchase Order Financing Basics

Purchase Order Financing, or PO Financing, can be a useful tool in your business, but it is also widely misunderstood in the business world. It is important to understand the basics of how it works and determine if it is right for your company before you decide to implement it into your business plan.

The first thing to determine is what kind of companies make good candidates for this type of funding. The best companies for this solution have a lot of characteristics in common. They buy and sell product without making modifications to them, they do not directly manufacture the products, their gross margins are 20 percent or higher, the suppliers are in good shape financially and reliable, the customers have good commercial credit, and the orders are at least $50,000. Due to these very specific and numerous qualifications, this solution isn’t right for everyone.

If PO Financing is a good solution for your company, the next step is to understand exactly how it works. Once your customer has placed their purchase order, you place the order with the supplier. If the supplier wants you to prepay for the order and you do not have the money to do so, that is where this type of financing comes in. the financing company would review the transaction and then pay your supplier directly for your order. After your customer receives their product and you invoice them, you can proceed by either factoring the invoice and using the proceeds to pay the financing company, or having the transaction proceed as normal and then paying the financing company back once your funds have been received. The first option, bringing in a factoring company, can yield a lower total transaction cost, which is why some people prefer to do it that way.

There is still a lot of information that can be gained on the topic of purchase order financing, and it is important that you understand the ins and outs before you proceed contacting a financing company to help with your orders. If you have an accountant or another type of financial advisor, they may be able to help you through this learning period to decide if financing is right for you and if it is a step you want to take. In the end, PO financing is a great way to help certain types of businesses operate when they may not have the funds available at that very moment.  Look into this option for assistance in ordering.

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