How does Purchase Order Funding Work?

     

     Cash flow challenges are a common issue in the business world. In fact, businesses have to borrow money either to expand or to solve their immediate cash flow problems.For instance, when a customer orders from your business, they are counting on you to deliver goods on time. When small businesses have to complete the orders they have to struggle a lot to find the right funding. And the last thing you have as a small business is to have to turn away a large purchase order because you don’t have enough cash in hand. Purchase Order Funding is one way to close temporary gaps that allow small businesses caught in a cash crunch to satisfy customers, keep operations running smoothly, and ultimately alleviating cash flow and raising profits. Purchase order funding is essentially a loan based on your orders. There are many options and methods available to borrow money for small to large scale businesses. Depending upon your business and its specific borrowing needs, purchase order financing is an effective way to raise the working capital that you will require immediately. It is considered a good fit for certain businesses with more orders coming before and fulfilling them before they have invoices and received payment for those orders. This can potentially cover the upfront costs with your suppliers so that you aren’t forced to turn down the orders, sales and other opportunities due to the cash flow restrictions.This can also be said as an advance which the businesses get before the invoices are paid by the customers. It can help them avoid burning bridges and losing customers in the future because they couldn’t afford to fill their orders at the moment. 

How purchase order financing works?

While it can get you supplies to complete your order but it is totally different from traditional loans. Instead of paying you they fund your supplier directly. There are four major components in the cycle of purchase order loan arrangement:

●      The financing company paying the money to fill a purchase order
●      The borrower
●      The supplier, who will deliver the products to your potential buyers.
●      Your buyers
 To explain it in a nutshell, the purchase order finance company provides funding to your suppliers to complete the order. Once the order is completed and delivered the finance service provider will collect the payment from the customer and pass the amount on to the borrower, that is you, after deducting fees.

For instance, you receive an order and don’t have enough funds to fulfill the order. Your options are also limited, so you can either delay the order or refuse the customer which can result in jeopardizing your relationship with your customer. In this case, if you can’t cover all or part of the costs, you can simply apply for purchase order funding. Just keep in mind that your credit history must be credible enough so that the lender may be willing to fund 100% of your order. Usually the lenders offer 90% or less, if you don’t qualify for full funding you can easily put up with additional fundings. The financing provider reviews the purchase order carefully including the supplier’s estimate, and other factors to determine whether you are eligible for the application. If approved, the lending company pays directly to the supplier. You receive the order from your supplier and ship them to your customers. Note that, if you have a reselling business the supplier might end up shipping the order directly to your customer. You can then send the invoice for the order you have fulfilled. Your customer pays the invoice amount directly to the financing company. They take out the relevant charges from what your customer has paid and the borrower receives the remaining balance.