What is Purchase Order Finance?

We all know that a purchase order, or PO for short, is an order form that is issued by a buyer and given to a seller, detailing the quantity and price of a product or service. Once the seller accepts the PO from the buyer, it immediately becomes an official confirmation of the order and can be used to raise finance. In a similar vein to unpaid invoices, POs play an important role in accounts payable.

They are used for a number of reasons, including the following:

  • They enable buyers to clarify their needs to sellers. They set clear expectations so both parties can use them when orders are not delivered as expected
  • They are official documents of incoming or pending deliveries. POs help businesses to track and manage orders more effectively
  • Once a PO is created, buyers can factor these costs into the budget
  • They are legally binding in the absence of a formal contract when it is accepted by the seller.

However, in the following scenarios, large orders can result in cash flow problems or become a barrier to doing business::

  • Fulfilling the order requires the business to have substantial cash reserves to fund the production process until they get paid by the end-customer.
  • The end-customer may enjoy long payment terms for the product they are receiving, typically up to 120 days.

What is Purchase Order Finance?

PO finance is a popular and effective finance solution for businesses that need a quick and effective cash flow boost to pay for the goods or raw materials that are needed to fulfil a large customer order, where the end-customer may be insisting on credit and unwilling to put down a deposit. At the same time, the supplier may be demanding a deposit or even payment in full prior to shipping.

The business may need working capital to fulfil orders from a single or a number of clients. Consequently, turning down the order would mean a loss of revenue and a blow to trading relationships as well as reputational damage.Therefore to avoid this scenario, the business can secure a cash boost to fund the transaction before the end-customer pays.

For companies in certain industries, such as manufacturing, transportation and logistics, and distribution, PO finance is frequently a suitable solution for the business. It’s similar to invoice finance as it gives businesses the opportunity to release 100% of the value of the PO against confirmed orders, providing goods and services to customers before the invoice is issued. The amount of PO finance received will depend on the size of the order as well as creditworthiness of the business that is issuing the order.

The Benefits of Purchase Order Finance

Since the financial crisis, many SMEs have struggled to access finance to ease cash flow problems and fund growth plans. Traditional lenders have rejected more than half of small business applications for business loans based on profitability and risk, leaving many ventures with unachievable ambitions and growth plans.

One of the benefits of PO finance is that it’s easy to access than traditional business loans. Additionally, the company doesn’t have to have a strong credit history as the funder’s focus will be on the creditworthiness of the client who created the order. Unlike traditional business loans, PO finance is dependent on the financial strength and creditworthiness of the company who has placed the order with the business and not on the business itself. This makes it a viable option for new businesses and those with imperfect credit ratings.

If you would like to find out whether purchase order finance or PO finance is an option for your business, please call 08000 746 757 or email info@companydebt.com for free and confidential advice from one of our professional advisers.

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