Purchase order financing is ideal for wholesalers, distributors and re-sellers who have purchase orders they can't fill because they lack funds. The PO finance company funds or guarantees (supplier guarantee) payment on your behalf to your supplier so you can ship goods to your customer. You invoice your customer; your customer sends payment to the PO finance company; then the PO finance company sends you the profit less fees.
Purchase order financing rates are based on the credit-worthiness of your customers, the reputation of your suppliers, the risk of the transactions, and your experience in the industry. Purchase order financing companies typically require that you have at least 20% gross profit margin in your product. Your purchase orders must be noncancellable and have no consignment or guaranteed sale terms.
Purchase order financing is always used with invoice factoring. Some PO finance companies require handling the invoice factoring as well as the PO funding. Some PO finance companies work with other factoring companies. Many factoring companies offer purchase order financing as an add-on service for clients that already factor with them. Due to its technical and risky nature, PO financing requires expertise.