Purchase Order Financing Explained
Every business needs cash to thrive and grow. Although, some businesses may struggle to have adequate cash, and there may not be enough cash to fulfill every order, especially large orders. This is when purchase order financing comes in.
What is Purchase Order Financing?
Purchase order financing is where a third party agrees to give a company enough cash to fund a customer’s purchase order. Purchase order financing allows a company to produce and sell goods without using bank debt. It allows a company to finance payments to its suppliers for manufacturing and transportation before receiving payments from a customer. It can’t be used to purchase anything other than goods to fulfill an order.
When is Purchase Order Financing Used?
Purchase order financing is one of the best ways to fund business growth. It is often used when a business has a spike in demand, consistent cash flow problems, startups looking to fuel growth, and or to reduce capital in shipping.
Businesses that use purchase order financing include distributors, outsourced manufacturers, resellers, wholesalers, importers or exporters of finished goods, businesses with heavy seasonal sales skews, and businesses that have tight cash flow that limits order fulfillment.
How Purchase Order Financing Works
There are eight basic steps in a purchase order financing transaction:
1. A company receives a purchase order.
2. The company receives a written cost proposal from a supplier that will purchase the goods.
3. The company applies for and receives approval to receive the financing.
4. The purchase order financing company pays the supplier to produce and deliver the goods.
5. The supplier delivers the ordered goods to the customer.
6. The company invoices the customer.
7. The customer pays the purchase order financing company.
8. The purchase order financing company pays your business after deducting its fees.
Seek Professional Franchise Funding Assistance
Contact Skogen Capital Lending, based in Gilbert, AZ for tailored solutions to meet your business needs. We are a nationally recognized provider of business loans, and we provide a wide range of options to provide the best financial solutions possible.