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If you’re trying to get more information about purchase order financing, you have probably realized that the terminologies aren’t explained properly. To help you along, here’s a purchase order financing glossary you can refer to:
- Invoice factoring. In the purchase order, the buyer specifies how long they would need before they can completely pay the amount for the goods or services you’ve provided. You’ll then get an invoice instead of cash. The PO financier or another lender may then forward you a percentage of the value of the invoice, and you get the full amount only when the buyer pays you in full. You then get the rest of your money after the advance, minus the fees charged by the invoice factor.
- Letter of credit. When you get financing through your purchase order, your funder doesn’t usually give you cash. Instead, it opens a letter of credit on your behalf. This letter of credit states a certain amount which is then used to pay your supplier when it delivers the goods you need.
- Purchase order financing. You will get the working capital you need by using the purchase order as a form of collateral. Let’s say you get a purchase order for $100,000 and the cost of the supplies you need is just $60,000. But if you don’t have the ready working capital to cover the cost of the supplies (which you may have to pay immediately) then you may not be able to produce what’s asked of you in the purchase order. With PO financing, you get the money you need right away.
- Purchase order. The P.O. is a legal document signed by a buyer requesting you as the vendor to provide the goods or services the buyer wants. Usually, it contains statements detailing the quantity and the description of the goods and services required of you, as well as a schedule as to when you should provide the goods. The price of the goods is also stated, including the terms of the payment.
- Rapid growth rate. Most companies want to grow, of course, but sometimes the growth can be too rapid. If the demand for your goods far outweighs what you can get from your suppliers with your working capital and your available credit, then you may not be able to take advantage of the increased demand.
- Sales volatility. This is a business situation in which the sales may have frequent ups and downs instead of a steady flow of sales. This is usually seen in highly seasonal industries, like flower shops and promotional item stores. When it’s a period of high sales opportunities, the orders for your goods may exceed what you can acquire with your current working capital.
- Working capital constraints. These are the limits set by your available working capital. A limited cash flow means you will have limited stocks from your suppliers, which then limits the purchase orders you can fulfill. Purchase order financing is designed to enable you to get past these constraints.