In this article:
- What is purchase order financing?
- How does purchase order financing work?
- How does purchase order financing work with invoice financing?
What is purchase order financing?
Purchase orders can be used by your business to act as security against a loan taken from a finance provider. The money is advanced straight away meaning you can pay for the materials required in order to fulfil your order without having to dip into your own funds.
The finance provider will charge a fee and the money will be received before the order is fulfilled rather than after.
How does purchase order financing work?
Your business receives a large order from a reliable customer and raises a purchase order. You then go to a finance provider and an agreement is put in place for purchase order financing.
The finance company agrees to pay a percentage of the value of the purchase order, which can be anything up to 90%. It is paid quickly and you now have the cash to pay your supplier for the materials required to fulfil your customer’s order.
Once the customer receives their goods, it pays the invoice according to the payment terms of the agreement and you repay your loan, including any fees incurred, to the finance provider.
How does purchase order financing work with invoice financing?
When your business needs to raise funds through purchase order financing, you might need to take out invoice financing to pay this off.
Purchase order financing is a more expensive form of loan than invoice financing. As payment terms of invoices can be lengthy, the resulting fees on purchase order financing can build up.
To minimise costs of purchase order finance, once the customer is invoiced, invoice financing can then be arranged and used to pay off the purchase order financing and thereby reduce the overall fees.