Maintaining consistent cash flow is a common problem for all businesses. However, it can be especially stressful for small business owners with fewer resources to rely on during the inevitable ups and downs of revenue streams. Purchase order financing can help level the playing field.

What Is Purchase Order Financing?

An important thing to understand about purchase order financing is that it differs from accounts receivable financing, which is another popular method of alternative financing. The main difference between the two is that accounts receivable financing exchanges unpaid customer invoices for cash while a purchase order financing agreement relies on customer orders as collateral. The lender provides funds to the borrower to purchase the supplies needed to fulfill customer orders. The orders themselves act as a form of collateral.

Applicants for purchase order financing can receive up to 100 percent of the funds needed to fulfill customer orders, but this is not common. The organization providing the funds typically likes to see the applicant contribute some money towards the project to prove good intentions. Businesses receiving purchase order funds must also pay interest on the loan.

Two Options for Purchase Order Financing

Companies offering this financing option typically approach it in one of the following ways:

• Remit payment to the manufacturer or supplier directly. The manufacturer or supplier would then be responsible for delivering the finished goods to the customer. 
• The lender and company needing credit to establish an ongoing relationship. Exercising this option allows companies needing funds to complete customer orders to have continual access to cash. The customer who receives the product remits payment to the lender, and the lender forwards the proceeds to the borrower after deducting its own fees.  

Either of the above options is far easier to obtain than a traditional bank loan. Lenders use the customer’s credit history rather than the applicant’s when making an approval decision. Borrowers do not need to pledge collateral and repayment terms are often more flexible as well.

Are you considering purchase order financing for your business? Please contact Painted Horse Financial today to learn more about it.