Purchase order financing is simpler than you may think. Let’s say you need funds to fulfill customer orders, but they’re paying you on net 60 or net 90 terms. A purchase order financing company (lender) can help to solve this cash flow problem. The lender can pay your supplier for the goods, so that your customers receive their orders in a timely manner, as expected. Your customer will send their payment to the purchase order lender when it is due, and the lender sends the funds on to you, less their fees. Here we’ll explain these basic steps in more detail:
- Your customer submits a PO, placing an order with you for a certain number of products.
- You contact your supplier/manufacturer for an estimate and invoice. If you lack the funds to fulfill, and your customer is (of course) not paying up front, you’ll need to request purchase order financing to complete the order.
- You apply for PO financing. Your lender may fund up to about 80 percent of your supplier’s costs, after considering your supplier’s reputation (reliability in producing the goods for your customer) and your customer’s credit (the likelihood that they will pay, on time, for the goods ordered).
- The loan is approved and your lender (the PO financing company) pays your manufacturer/supplier. You must pay the difference to the supplier, who can now produce the goods ordered by your customer.
- Supplier/manufacturer delivers goods to your customer.
- You invoice your customer requesting payment for the goods.
- Your customer pays the lender directly. If the customer plans make partial payments over time, this is called invoice factoring, which typically has lower fees.
- The lender forwards the customer’s payment to you, after deducting their loan fees.
If you’re interested in purchase order financing to improve your business cash flow, contact Flex Capital today.