Purchase Order Financing:
Shortage of working capital and credit gap are some of the most significant challenges impeding the growth of small businesses. . It is because most of the time, suppliers ask to be paid upfront, but customers often clear payments 60-90 days after the shipment of products. Nevertheless, with PO financing, small businesses can make the most of such a situation and access required funds to meet working capital requirements smoothly.
What is Purchase Order Finance?
Purchase order financing can be best described as an immediate finance option that helps businesses access capital to meet their funding requirements. Typically, under this finance option fund is disbursed against verified purchase orders.
Generally, businesses in their growth stage or firms with limited cash flow consider PO financing as a viable funding option. The funding option is designed to help small businesses to complete big orders successfully.
These following entities use purchase order financing to meet their capital requirements –
- Importer of finished goods
- Exporter of finished goods
- Outsourced manufacturers
- Government contractors
- Businesses with credit score
Notably, only companies who sell finished products, business-to-government customers, or business-to-business customers are considered eligible for this finance option. In other words, sellers of raw materials or semi-finished products/parts cannot become a beneficiary of this financing solution.
Such business entities, however, can gain access to funds by availing our invoice discounting services and meet their working capital requirements. KredX provides businesses funds within 24 hours to 72 hours* against their unpaid invoices and help to shorten the operating capital cycle successfully.
How Does Purchase Order Financing Work?
These pointers below highlight how PO financing works –
- Intending buyers place an order by issuing a PO.
- Once the order is conveyed to suppliers, they estimate the cost involved.
- To meet the working capital gap, businesses decide to apply for a purchase order financing.
- The PO financier extends cash to the supplier.
- On receiving the payment, the supplier delivers the product to its customer.
- After shipment, the seller issues invoices.
- On the agreed date, the customer pays the due amount to the PO financing company.
- Receiving the payment, the financier, in turn, pays the seller after deducting a financing fee.
The process of PO financing is, thus, extremely simple and hassle-free. However, to make the most of this funding option and understand its usefulness, businesses must weigh in its accompanying pros and cons.
Advantages Of Purchase Order Finance:
These are some noteworthy advantages of purchase order financing –
- PO financing is easy to avail. It comes in handy for businesses with low creditworthiness.
- Enables SMEs to secure substantial cash and helps in boosting their operations.
- Proves useful in meeting big orders with ease and ensures quality production.
- Helps to secure and retain big clients and in turn, helps to expand the business operations and clientele.
- No requirement for providing a personal guarantee.
- Relatively flexible when compared to business loans. Businesses may raise up to 100% of their purchase order amount by meeting essential requirements.
- Helps businesses to strengthen the supply chain by providing funding to suppliers. It also helps to maintain a pleasant client and supplier relationship.
Regardless, there are several drawbacks of this finance option. Being familiar with them enables businesses to make an informed decision about opting for funding through it.
Disadvantage Of Purchase Order Finance:
These are some prominent limitations of PO financing –
- The cost associated with purchase order finance is relatively high.
- There is no guarantee that a company will be able to raise a 100% of the PO’s value.
- There is no confidentiality as the customers have to settle the account with the financier instead of the seller.
- This funding option is not available for service-oriented businesses or businesses that deal with semi-finished or parts of products.
- It can be availed only for a short duration.
Businesses should gauge these advantages and disadvantages to decide whether PO financing will be suitable for them. They may also consider alternative finance options like – invoice discounting to meet their business’ funding requirements. With KredX, you can avail the invoice discounting services and raise the required capital to maintain cash flow . We extend customised zero-liability solutions that do not impact your balance sheet.
Frequently Asked Questions on PO Financing:
A. Typically, a purchase order is generated when a customer places an order. Alternatively, an invoice is generated after an order has been completed. A purchase order elucidates sales contract whereas an invoice confirms the act of sale.
A. It is recommended that vendors restrain from shipping products or to offer any service before a purchase order is issued. Such a document helps vendors become aware of the cost of the transaction and also proves useful for collecting it.
A. It is a commercial document, which serves as an official offer essentially issued by a buyer to a seller. The PO helps to control the purchase of products or services from external suppliers.
A. Once the PO is sent, the vendor decides if he/she wants to take up the order or not. On approval, the purchase order becomes legally binding. Typically, the purchaser pays for the order at an agreed price and date.
A. Unlike PO finance, in invoice finance funds can be availed against the products that have been shipped or services that have been rendered whose payment is due. Conversely, in PO finance funds can be availed before products have been delivered or invoiced.
A. One can cancel the purchase order as long as a payment against the same has not to be made to the concerned supplier. Since the buyer issues the order, they can cancel it too. Also, the same concern can be raised by a supplier and forwarded to a buyer.