What is PO Financing?

Types of purchase orders

PO financing, also known as purchase order financing, is a funding small businesses can use to finance their working capital needs. 

It is a short-term loan typically used to pay for supplies or inventory purchased from a supplier on credit. The business then repays the loan, plus fees and interest, when it receives payment from its customer for the products or services supplied.

A PO loan can be an excellent way for a small business to improve its cash flow and obtain the working capital they need to grow and succeed. 

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How does purchase order financing work?

When a company uses PO financing, it uses its customers' purchase orders as collateral to secure credit.

The process begins when the company applies for a PO loan with a lender. If the loan is approved, the lender will provide the company with the cash it needs to pay its suppliers. The supplier will then send their invoice directly to the lender, who will issue payment on behalf of the company. 

Once the customer receives the goods or services, they will send payment to the lender, who will then use that money to pay off the loan. 

While PO financing can be helpful for businesses that need to place large orders, it's important to remember that it's still a loan and should be repaid on time to avoid damaging your credit.

PO financing agreements

PO financing agreements must be in place to protect all parties. The agreements will specify the following elements: the total cost of the purchase, payment terms, and delivery date. Finally, the financing agreement, supported by efficient purchasing software, should unequivocally outline any contingencies or special conditions. Incorporating these crucial components ensures that both parties possess a clear comprehension of the purchase terms, minimizing the potential for misunderstanding or disputes.

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