Purchase Order Financing

Purchase Order Financing

Purchase order financing is ideal for distributors and wholesalers who have large purchase orders they can’t fill due to lack of funds. The PO finance company funds or guarantees payment to your manufacturer or supplier on your behalf so you fulfill the order for your customer. The customer invoices are typically handled as an invoice factoring transaction.

Invoice factoring usually occurs with purchase order financing. The PO finance company purchases your customer’s invoice, collects the invoice amount and sends you the remaining profit.

Purchase order financing companies often require that you have at least 20% gross profit margin in your order. Purchase orders must be noncancellable and have no consignment or guaranteed sale terms.

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.

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 special expertise.

How PO Financing Works

After you receive the purchase order from your customer, you send the order to your PO finance company.

Your PO finance company will advance money or guarantee payment to your manufacturer or supplier to cover the cost of goods.

Once your customer takes possession of the goods, send the customer invoice is sent to both your customer and your PO finance company.

The PO finance company or a factoring company partner will purchase the invoice and handle it as an invoice factoring transaction.

Your customer pays the PO finance company for the invoice and the PO finance company sends you the profit on the entire transaction.