An In-Depth Guide to Purchase Order Financing

by | Feb 27, 2024 | Blog

Purchase order financing (PO financing) can be a valuable tool for businesses in need of additional funding to fulfill customer orders. This unique financial solution is designed specifically for businesses that sell goods or services to other businesses or government agencies. In this post, we will delve deeply into what PO financing is, who benefits from it, and how it works.

What is Purchase Order Financing?

Purchase order financing is a type of short-term commercial finance solution that provides capital to pay suppliers upfront for verified purchase orders. Businesses avoid depleting their cash reserves or declining an order due to cash flow issues. It’s a way to finance growth without taking on new debt or giving up equity.

Who Can Benefit From Purchase Order Financing?

PO financing is ideal for businesses that have received a purchase order but lack the funds to fulfill it. These typically include wholesalers, distributors, resellers, or outsourced manufacturers. The key is that the business must be selling a finished product to a B2B or B2G (Business to Business or Business to Government) customer.

How Does Purchase Order Financing Work?

The process typically involves four parties – the financing company, the buyer, the supplier, and the business seeking the funding. Here’s how the process usually works:

  1. The business receives a purchase order from a customer.
  2. The business contacts the finance company, who agrees to pay the supplier directly.
  3. The supplier manufactures and delivers the product directly to the customer.
  4. The customer pays the financing company directly.
  5. The financing company subtracts its fees and then pays the remaining balance to the business.

Purchase order financing can be an excellent solution for businesses in need of funding to fulfill large orders. It allows companies to maintain positive cash flow, take on larger orders, and grow their business without taking on new debt or selling equity. If you need purchase order financing for your business, contact the team at Latta Commercial Capital today.