Purchase Order Financing
Purchase Order Financing
Purchase order financing is ideal for resellers and contract manufacturers who don’t have the necessary funds to fill large customer PO’s. A purchase order finance company funds or guarantees payment to your manufacturer or supplier so you can purchase necessary inventory of goods or supplies.
Most PO finance companies will partner with an invoice factoring company to purchase your invoice upon the sale of goods to your customer. Sometimes, the PO finance company will handle both the PO financing and invoice factoring.
Due to its technical and risky nature, PO financing requires special expertise and a deep understanding of the risks involved with this unconventional type of financing. There are only a handful of companies that focus exclusively on PO financing.
PO financing rates vary between 2% and 5% based on a variety of factors including the reliability of your suppliers; your industry background and experience; the credit-worthiness of your customers; and the length of time it takes to complete the order. Invoice factoring rates are typically 2-3%, making the total cost of PO financing and factoring somewhere in the range of 4% to 8%.
How PO financing works:
- Submit your PO’s to the PO finance company (POFC).
- The POFC guarantees payment to your supplier.
- The finished goods are sold to your customer.
- The factoring company buys your invoice; pays the POFC for supplier costs and POF fees; and holds the remainder as a reserve.
- The POFC pays your supplier for the cost of goods.
- When the invoice is due, your customer pays the factoring company.
- The factoring company sends you the reserve, less factoring fees.