What is Purchase Order, or "PO" Funding or Financing?
Purchase order (PO) funding, also known as purchase order financing, is a financing option for businesses that need cash to fill single or multiple customer orders. In many businesses, particularly those that produce goods, the lack of available funds can be a barrier to meeting the demand of customers. PO funding can help such businesses fulfill their customer orders and grow without having to dilute equity or take on additional bank debt.
Here is how it typically works:
1. Order Placement: A business receives a purchase order from a customer but does not have the necessary funds to manufacture or deliver the product.
2. Funding Request: The business approaches a purchase order funding company for financing.
3. Payment to Supplier: The PO funding company pays the supplier directly (often using a letter of credit), enabling the supplier to produce and ship the goods.
4. Order Fulfillment: The business delivers the goods to the customer and sends an invoice.
5. Payment Collection: The customer pays the invoice, often directly to the PO financing company.
6. Closing the Loop: After taking its fees, the PO funding company remits the balance to the business.
Here are some advantages of purchase order funding:
No Debt: PO funding is not a loan, so there is no debt incurred. It is a transaction-based form of financing.
Growth: It enables businesses to accept larger orders than they could with their current cash flow.
Focus on Core Competency: Businesses can focus on sales and operations rather than financial constraints.
However, there are also some drawbacks:
Cost: PO financing can be more expensive than traditional forms of financing.
Qualification: Not all orders or businesses qualify. Typically, PO funders prefer businesses with a track record and orders from creditworthy customers.
Control: The funding company may want to verify the details of orders and potentially be involved in the process, which might not be preferable for some businesses.