Purchase Order Financing as a Solution to Cash-Strapped Businesses

A lot of people are getting confused with the difference between purchase order financing and accounts receivable financing. Both can be quick sources of funds to keep your business going but of course, both are running on different terms.

fast Purchase order financing
Purchase order financing is also sometimes referred to as pre-delivery financing. It is meant to be a short term way of allotting funds to your inventory that are required to complete an entire sales transaction.


Take this as an example; if you’re a business owner and you just have landed a deal with a huge corporation or a government agency, but you don’t have enough funds to cover the manufacturing and delivery. What will you do?  The recourse is to find a quick source of cash; otherwise, you stand losing the order and possibly create a dent on customer relationship, too.

In situations like this, business owners are looking into alternative lending solutions that have the capacity to provide them a loan in such a quick turnaround; and that’s where purchase order financing comes into play.

What is Purchase Order Financing?

Purchase order financing is also sometimes referred to as pre-delivery financing. It is meant to be a short term way of allotting funds to your inventory that are required to complete an entire sales transaction. PO financing is designed for growing businesses that have very little access to working capital or those that are suffering from cash flow issues. Mostly, the types of businesses that are qualified to take out a purchase order financing are producers, wholesalers, distributors, or resellers of manufacturing products.


Purchase Order Financing for Businesses with No Credit History


In a purchase order financing deal, the lenders will evaluate the credit history and ratings of your clients, not your company. So even if your business does not have a credit history to boast of, many lenders are still going to work with you on the deal. If your client has a solid track record in terms of payments, credits and such, then there’s a good chance that a lending company may be willing to finance your sales transaction.


PO Financing: How Does It Work?


A typical purchase order finance deal looks like this:


  • You scored a large business deal with a reputable client, but you don’t have enough funds to cover all the costs necessary to complete the entire sales transaction.
  • You go to a lender and apply for a PO loan. Lender checks your customer credit rating and if it passes, they’ll agree to finance your transaction.
  • PO lender issues the funds, you complete the transaction and deliver the goods to your client.
  • Once the client pays up, the PO lender collects the money, gets its share of the pie and gives back to you the remaining proceeds of the sale.


Yes, a chunk of the profit will have to be sacrificed, but if you really want your business to survive and honor your commitments with your clients, then opting for a purchase order financing is worth a shot.

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Purchase Order Financing | How it works

Purchase order financing puts a different spin on raising capital to fund your business. Instead of borrowing against assets you hold, or selling invoices that you issue, you instead acquire that money on the basis of an order that a customer places with you.

Let me explain what I mean.

By definition, a purchase order is a request for a product to be delivered on one day, but paid for on another.  If you have a credit card, then you do exactly the same thing every time you use it.

The financial institution that issues the card, in effect, gives you a loan to buy whatever items you obtain with it. Most people don’t see credit cards in that light, which is perhaps one reason why they get into debt so easily.

But the principle behind purchase order financing is exactly the same. You don’t have to part with cash at the time that you buy. In fact, you don’t actually pay the supplier. Instead you repay the bank for the loan.


Here’s how it works:


The company such as Neebo Capital takes your purchase order as collateral for a loan. The finance company gives you the money in exchange for that order. They issue a Letter of Credit, which amounts to the loan documents, and then give it to your supplier. The supplier is now the borrower.


When the supplier fulfills the order, you can then resell it as part of your normal business. Then you can use some of your profit to pay the supplier, who in turn redeems the Letter of Credit they received from the bank. In other words, it’s a means for you to pay your supplier on time without draining your company of the money it needs to continue to trade.

Companies of all sizes can benefit from this form of financing, but it works especially well for wholesalers.

Let’s say that you receive an unusually large order. You don’t want to increase your credit risk with the bank any further by obtaining an ordinary loan and, in any case, the length of time under normal circumstances to get one could cause you to lose the order altogether.

You know that you’ll make the money needed to cover the loan after you fill the order, but you need the additional money now so that you can.

Or, let’s say that you receive an order from a foreign country. That can add a level of complication the companies that only trade in the US can’t even imagine. Not only are delivery times longer, but payment has to pass through the arduous, and sometimes costly, process of exchanging one currency for another.

There is one proviso, however, and that is that your supplier must be a reliable, creditworthy firm. That’s because he bank wants to be sure that you will be able to repay the money that it loans you.

Your ability to do that is based on the assumption that the supplier will give you what you need to fill the order. Then, when you’ve paid the supplier, they can then repay the bank.

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Purchase Order Finance and Accounts Receivable Financing

Have you ever considered Purchase Order Financing or Accounts Receivable Financing , also known as factoring invoices?

In contrast to Purchase Order Financing, Accounts Receivable Financing focuses on advancing a large portion of the invoice immediately after the product is delivered to the customer. Instead of waiting Net 30 to up to net 90 days to get paid, an accounts receivable financing company is able to reduce the wait to virtually net zero by advancing 70-90 percent of the invoice amount. After the full payment has been received from the customer the accounts receivable financing company will transfer the remaining portion of the invoice, minus their cost (typically one to three percent).


Get you Cash Fast!  As compared to the drawn out process of traditional financing, both Purchase Order Financing and Accounts Receivable Financing can be obtained in a matter of days, albeit Accounts Receivable financing can be faster than purchase order financing.

Credit Worthiness. Both methods focus on the credit worthiness of your client, not your balance sheet. Traditional lending look to your past history of managing your company’s finances and credit when deciding if a line of credit will be approved. Purchase Order Financing and Accounts Receivable Financing, on the other hand, will look to the future of your company and the creditworthiness of your clients.

These two funding strategies are  great for newer companies. Companies without a track record of at least 2-4 years,  you may  not have much of a shot at getting approved for business credit through a traditional lender. Since purchase order financing and accounts receivable financing companies put more weight on your clients creditworthiness, than on yours, young businesses are able to get the financing they need! Visit NeeBo Capital Today!

Picking a Local Factoring Company?

Management will tell you local business accounts for a portion of their larger clients. Why? Because we feel more comfortable handling business in person, face to face. A key benefit of local business is regular meetings. This is why we position our offices close to a major international airport, because we encourage meet-ups with our clients.
Location is important, so on the subject of picking a factoring company is it best to go with a local provider?
Without complicating things the answer is no. You need to pick a factoring company who will offer you the services you need at the rate you want. Nothing is worse than doing business with a factoring company just because they are local, and soon finding out you over paid and they are an unorganized company.
Your invoice factoring and purchase order financing can take place via fax, email, or phone. So clearly location is only a minor part of the equation. At NeeBo Capital we frequently fly to our clients offices in order to solidify our relationship as your choice factoring invoice firm.