Financing a purchase order is a particular form of business loan system that allows companies to fill their current orders with their clients. Businesses can capitalize on existing business relationships by financing purchase orders to obtain liquidity to fill new orders, rather than using current cash or other lines of credit.
Maintaining a stable cash flow is difficult as it is, but funding for purchasing orders is one way of ensuring a company never has to turn down orders or give up growth opportunities.
Typically, financing for purchase orders is used by business owners who receive larger than average orders, and is particularly useful when a business goes through periods of rapid growth.
In these cases, growing pains can be alleviated by capitalizing on funding for purchase order to obtain help in order fulfillment, placing borrowing companies in the right place to take on larger and larger orders.
Financing for purchase orders is an important and common form of financing for business-to-business (B2B) sectors, offering resources to businesses to complete their purchase orders. Since purchasing order funding relies on the purchase order itself, the lender may usually use the value of the purchase order as leverage to obtain the funds.
This means that throughout the underwriting process, lenders generally consider the customers ‘ credibility and trade power rather than the borrowing business ‘ credit history. With the financing of purchase order, the lender’s emphasis is on the risk that the customers will not be able to pay their invoices once their orders are completed.
Financing for purchase orders is a fairly simple method for businesses to access the capital required to fill their purchase orders. Especially with the internet, finding information about purchase order financing is easy and rapid for business owners.
In certain cases, you can complete the entire application and certification process electronically, and collect funds in as little as a day. There is some uncertainty, however, about the method of using purchase order funding to complete orders.
1. The order is placed by customer.
The first step in the procurement order funding process is when your client places an order with you, the borrowing company.
For whatever reason, you want to obtain funds from a lender to pay your supplier to fill in your customer’s order.
Whether you don’t have the funds at your disposal or want to free up working capital for other expenses, you might decide that you need financial support to fill your client’s order.
When your company receives a purchase order from your client, you can use the purchase order to secure financing to complete the order itself.
2. The supplier provides a cost breakdown
The first step in the financing process for the purchase order is when your client places an order with you, the borrowing company.
Of any purpose, you want to borrow funds from a lender to pay for your supplier to complete the order from your client.
If you don’t have the funds at your disposal or want to free up working capital for other expenses, you can decide you need financial help to complete the order from your client.
If your company receives your client’s purchase order, you will use the purchase order to secure funding to complete the order itself.
3. You submit purchase order to the lender
Once the costs for completing the order are determined by your supplier, you will reach out to a lender.
Usually, the purchaser will need to see a cost breakdown from the manufacturer to suit the terms of the purchase order agreement when evaluating requests for purchase order financing.
That is how the lender can validate the amount you need to complete the order, and assess the eligibility of your company based on the purchase order terms and cost breakdown.
4. The supplier is paid by the lender
Upon obtaining your supplier’s purchasing details and cost analysis, the lender may determine the qualification and restriction eligibility of your company, typically based on the purchase order terms and the customer’s trade and credit background.
If accepted, the next move is for the lender to pay the supplier the funds to fill out the order.
This phase is widely misunderstood in business: Instead of charging the funds directly to the seller or directly to the buyer, as in other forms of funding, the lender usually directly pays the supplier to complete the transaction and fill the customer’s order.
5. The order is filled by the supplier
The next step after the lender sends the funds to the supplier is for the supplier to manufacture the commodity, ship or deliver the products and then invoice the customer.
When you determine that your corporation can not use company money to fulfill your orders, the financing of purchasing orders allows you to apply for funding where the provider can make payments to the manufacturer so that the orders for their customers are filled in.
When the lender makes the payment to the manufacturer, the consumer collects from you what they have ordered, and collects an invoice.
6. The lender is paid by the customer
They send their invoice payments directly to the lender after the customer has its orders filled out from the supplier.
Rather than making the payment directly to your business, the supplier will typically provide the customer with an invoice at the time of delivery, and the invoice will be paid to the lender.
At this point, the supplier on behalf of your company has already obtained payment from the lender.
Now that the customer’s transaction has been received, they make their invoice payments which go directly to the lender.
7. The balance is paid by the lender
Once your client pays the lender the invoice, the lender pays your business the balance remaining.
Usually, the rates and fees associated with the lending arrangements for the purchase order are set by the lender and added to the expense of fulfilling the order, not to the value of the invoice.
If the lender collects the invoice payment from the client, they will collect their payment via the transaction and rate taken out of the cost to complete the order and return the outstanding balance to the company.
How is purchase order financing different from invoice factoring
Many business owners have expressed confusion about the similarities and differences between financing the purchase order and factoring the invoices.
Both are specific types of asset-based lending products that consider the value of transaction agreements of different types as collateral to secure funding.
There is a common sequence of events for most B2B sales: the buyer places the order to the seller (usually by purchasing order), the seller carries out the order through their suppliers, the supplier completes the order to the buyer, and the buyer receives an invoice and makes payment to the seller.
The funding of purchase order and the factoring of invoices also add further steps to this chain of events.
The disparity between the two is the date of delivery of the product to the purchaser. The goods or services are still to be provided with purchase order financing which makes the transaction a higher risk for a lender.
The goods or services have already been supplied and approved with invoice factoring, which decreases the risk to the lender and in the end will provide lower prices and charges for the borrowing sector.