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
- 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
- Receiving the payment, the financier, in turn, pays the seller after deducting a
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
- 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
- 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.
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.
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.
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
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.
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
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.