What is Purchase Order Financing?

Purchase order financing provide you with the capital so that you can pay to your suppliers. It provides for easy capital to the wholesalers, distributers, resellers and quite common in the manufacturing industry. It is a mode of obtaining short term finances from the bank so as to pay to the suppliers and close the sale.

How can the purchase order be beneficial for you?
Suppose that a client approaches you with a big order. This order is really big and important for your business. Also the client that has approached you is a reputed one in the industry. You readily accept the terms and accept to pay to your client within the agreed time. But you don't have the necessary finances. Even if you try out then also you will not be able to arrange the big sum to pay to your client. In such conditions purchase order financing is the method which saves you from such adverse situations. Here you approach the financing company that pays to your client on your behalf through a letter of credit.

What do the financing company look for before paying for your transactions?
They just look into the financial strength of your client. If your client has a reputation in the industry or is a government company then the company sanctions your finances. They also look into the profit margin that your deal will offer you. A margin of 25% or more is sufficient enough to satisfy the financial company to pay your client the requisite sum. Some companies also lay out the minimum amount that should be placed in the order.

How does the process work?
Suppose that you client places an order of $200,000. You then reach out the financing company for the finances. This company buys the order for your client from your supplier in your name and pays the supplier through the letter of credit. The financing can be up to 100%. The order is finally delivered to your client and the invoice is received. All the transactions settle after your client pays the invoice. This helps you to settle your order and makes the timely delivery to your valuable client.

Purchase order financing is the quicker method of financing and is convenient when compared to other financing methods like loans etc. this is because they basically require a valid purchase order and a reliable reputed client who has placed the order.