Purchase Order Finance - All The Things You Need To Know

A purchase order is a buyer-seller agreement on prices and quantities for a product or service when it’s acknowledged by the seller. Purchase order finance, commonly known as ‘PO Finance,’ is a type of financing that helps firms pay their suppliers and manage their cash flow.

Purchase order financing is thus a viable and popular alternative for companies that require a rapid and efficient method of financing their purchase orders.

What Are the Benefits of Purchase Order Financing?

Purchase Order Funding is used to pay for the manufacturing of the commodities showed on the PO. 
PO funding applicants are not permitted to utilize the funds for any other purpose.
This financing option ensures that the buyer’s orders are fulfilled while still maintaining a clean credit history for other business loans.

1. Fast Access to Cash

This form of financing provides a quick cash injection, allowing businesses to fulfill large orders that they otherwise couldn’t handle.

2. No Collateral Required

PO financing often doesn’t require hard assets as collateral, making it accessible for businesses without significant property or equipment.

3. Creditworthiness

It leverages the creditworthiness of your customers, not your business, which can be beneficial for companies with a less-established credit history.

Drawbacks

1. Cost

PO financing can be more expensive than traditional loan options, with fees ranging from 1.8% to 6% per month.

2. Limited Scope

It only covers the cost of goods sold, not other operating expenses like rent, payroll, etc.

3. Relinquished Control

The financing company will often handle invoices and payments, meaning you have less control over these financial interactions with your customer.

What is Purchase Order Financing, and how does it work?

Your buyer sends you a huge purchase order. A large order necessitates getting multiple components from your suppliers ahead of time.

Consider this: You’re a supplier of electronic components, and a company has just placed a million-unit order with you. Chipsets and semiconductors from multiple vendors are required to make such microchips.

How could you accept the PO if you lacked the ability to pay for your suppliers?

Is it possible to get purchase order financing?

To obtain finance from a financial institution, a Purchase Order finance is your tool.

At this point, you can contact a lending institution and outline all of your finance needs. Because your customer is a well-known and respected company, purchase order financing is doable.

The finance lender evaluates your application and establishes a credit limit for you. The finance company will provide the financing choices accessible when the credit check and due diligence are confirmed.

The materials are paid for directly by the lender to the makers. After that, you’ll have the supplies, and you’ll be able to start making microchips. There are two possibilities once the microchips have been completed and are ready to  transport:

• If the payment terms are “Cash on Delivery,” the company will immediately pay the invoice to the supplier. 
• Invoice the purchaser on a credit basis, e.g. 60-90 days. Then apply for invoice discounting using the invoice. As a result, further funding can be obtained right away.

The supplier can now settle the Purchase Order Financing with the lending institution because he has cash on hand. There should be no unpleasant surprises because the fees and costs are pre-agreed at the time of the lending arrangement.

What are the businesses eligible for Purchase Order Financing?

Large orders from suppliers characterize the industries that qualify for buy-order financing. Manufacturing, Retail, Distribution, and Import/export industries look for PO finance. 

How does Oxyzo step in the picture? 

When huge purchase orders come in from purchasers, one of the major issues SMEs encounter is cash flow. It also exacerbates short-term cash flow inconsistencies. Having access to finance purchase orders is thus a means of obtaining operating capital.

Traditional or alternative purchase order finance providers might be approached by the borrowing company. FinTech firms can help with purchase order finance. Companies like Oxyzo typically have a more expedited onboarding process. It provides for a shorter period between the client’s initial inquiry and the payments reaching the manufacturer’s bank account.