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How does Purchase Order Financing Work?

When you think of your company’s assets, what’s the first thought that comes to mind? It’s more than likely that you’ll think of your company’s inventory, its open invoices, your current customer orders, any equipment or machinery, and any real estate holdings. Now think of which asset can best be used as collateral to secure the working capital your company needs. Which one did you choose? Was it your equipment and machinery and any other current capital expenditures? Regardless of the answer, the one that’s quickly becoming a source of immediate capital for cash-strapped businesses is their customer’s unfulfilled orders. Surprised to hear that your open orders, contracts and long-term agreements can be leveraged to secure financing? Don’t be! Purchase order financing is a proven method of raising capital, capital your company can use to secure the parts and raw materials needed to fulfill current customer demand.

No longer does your company have to be concerned with the size and scope of the business it’s pursuing. No longer will your business development be hampered by a lack of available credit. If your company can close the business, then purchase order financing can help you with your capital requirements. So how does this alternative financing approach work?

Purchase order financing works by advancing your company funds in order to finance existing customer orders and contracts. Your company is advanced a portion of a given order’s value. This advance allows your enterprise to purchase the raw materials, parts and finished goods needed to fulfill your customer’s requirements. Once that order is fulfilled, the financing company then proceeds to collect on the open and unpaid customer invoice. After the invoice is paid in full, the financing company reimburses your company the difference between the initial advance and the customer’s final payment. A fee is then deducted for the service. As a point of interest, these fees are competitive with today’s interest rates and help to alleviate the high costs of inventory financing.

Companies that use purchase order financing are able to run a credit line based on current backlog and forecasted demand. This eases the issues associated with an uneven cash position, and allows companies to secure favorable payment terms from existing vendors. Most importantly, it allows companies to use the money in whatever way they deem necessary. It reduces the company’s daily cost of money and helps ease the burden of delinquent customer payments.

Purchase order financing works because it alleviates the high costs of inventory carrying costs. All companies understand that inventory costs money, but by using this financing vehicle, companies are able to dramatically reduce their costs to finance stock levels. They no longer have to concern themselves with the high costs of stock outs or low inventory counts and its impact on sales. Instead, they can improve their cash position with an affordable financing vehicle.