What Are The Basics of Purchase Order Finance?
The Basics of Purchase Order Finance is a financing given to businesses with the purpose of allowing them to have enough cash to pay for their orders. First of all, this allow companies to accept huge amount of orders and it also help the receiver to reduce their loans amounts. As such, they will have to ability to secure enough cash to fund the orders while waiting for the payments of their customers.
The lender will then directly pay the supplier by cash or sending them a letter of credit. This is the reason why this type of financing is more appropriate for businesses which intend to place big amount of orders. It is available to both small and big reseller companies which might have lack of cash flow to pay the suppliers or manufacturers. In addition, the cost of PO Finance depends on different transaction factors, which are generally short-term, lasting between 30-90 days.
Main actors in such a transaction are:
There are 4 important actors that we have to keep in account in discussing the Basics of Purchase Order Finance programs:
- Bank/Financier: The bank or financing lender paying the suppliers or the client company.
- Client Company: The client company is the company that requires funds to fulfil the orders.
- End customer: The end customers are the customers paying the invoices or the delivered final products.
- Supplier: The company or manufacturer which is selling the materials to the client company to be able to fulfil the orders.
Pros and cons of the Basics of Purchase Order Finance:
The advantages of the purchase order finance:
- Easier to qualify for it than bank financing.
- It is an advance payment.
- You don’t need to have an excellent credit rating.
- It can grow with your revenues.
- The service is very convenient.
- There are no hassle of instalments.
- The disadvantages of the purchase order finance:
- It is mostly granted to resellers and distributors.
- You have to convince the lender that the purchase order will be fulfilled.
- It only covers the manufacturers’ bills.
- The customers don’t communicate directly with you directly.
- Financing fee is charged upfront.
The basics of purchase order finance is funding given to businesses which don’t have enough cash to pay for their orders. As a result, this will allow companies to accept huge amount of orders and it also help the receiver to reduce his loans amounts. In this way they will have to possibility to secure enough cash to fund the orders. Accounts Receivable Factoring can then advance funds while waiting for the payments of customers. This type of financing is especially relevant to businesses which intend to place big amount of orders due to business need. Finally, PO Finance is available to both small and big wholesaler companies which might have lack of cash flow to pay the suppliers or manufacturers.