Purchase Order Financing Process: How It Works

It can get a bit frustrating trying to jump through all the hoops required by your bank before you get the loan you need to fuel the stability and growth of your company. This is especially true if you have a customer with a huge purchase order that gives you massive profits, if only you had the cash flow to fulfill the order. But there’s a way to use the purchase order as collateral to get the funding you need and this purchase order process of financing is actually quite simple.

  1. You get a purchase order issued by your client, but you don’t have the resources to fulfill the order. So you approach an alternative lender to avail of purchase order financing. Generally, the lender checks that you have the ability to provide what’s needed (at a profit), and that the customer has a good reputation.

What this means is that you don’t have to spend too much time during the financing application process. And if you have a government contract or a large reputable firm as a customer, it speeds up the process even further.

  1. Once the financing company agrees to fund the purchase order, they will pay your suppliers on your behalf. This may be in the form of cash, letter of credit, or a guarantee. Your supplier can then trade with you in full confidence that they will be paid for their services.
  2. Your supplier then ships the goods, you deliver the order to the customer, and then you provide the invoice. You then send a copy of the invoice to the finance company along with the proof of delivery.
  3. Usually, the invoice goes through a factoring process, in which you get a percentage of the value in advance from the lender. That means you may get about 80% of the value of the invoice right away, so you can use them for your most important expenses. The rest of the money is held in reserve by the lender.
  4. Once the customer finally pays in full, the finance company sends you the rest of the payment, minus the fees for the purchase order financing service. These fees depend on a lot of factors, such as the amount of money to pay the suppliers and the length of time it takes for the customer to settle what was owed.

It’s such a simple process, but it works. You can get the funding you need without wasting too much time, and you don’t even have to actually borrow money. The purchase order process enables you to accept large orders without having to disappoint your customers or make your suppliers unhappy.

What this means is that you’re no longer limited to bank loans to secure the growth of your company. Even if you don’t have the credit and the collateral needed for a loan, you can still get the capital you need a lot more quickly.


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Chris Lanchech

Hi everyone, my name is Chris and I am a junior analyst at Neebo Capital and an inspiring blogger. We enjoy speaking with business owners and entrepreneurs who come to Neebo Capital looking for cash flow solutions. Give us a call toll free at 1-888-382-3766 or Visit us online at www.neebocapital.com