Purchase Order Finance is funding advanced to a supplier secured against a confirmed Purchase Order.
To qualify for this type of funding the Purchase Order will need to have come from a relatively well established and financially secure customer as the finance company will want to make sure that the buyer is in a position to pay for the goods once they have been completed.
A common problem for young and growing businesses is that when they receive a potentially valuable order from a large organisation, they often find they don’t have the available cash resources to pay for the products to be produced. The problem will likely be worsened when the order is delivered and an invoice is raised as they may not be paid for another 60 or even 90 days!
Purchase Order Finance can help businesses address this funding gap by assisting with the financing of the transaction up until the time an invoice is raised. The level of funding will depend upon the make-up of the order and the strength of the company issuing the Purchase Order.
The company providing the Purchase Order finance will normally charge a transaction fee and interest on the monies advanced. These fees will need to be paid once the goods have been delivered and the invoice sent to the customer.
The fees are commonly repaid from an Invoice Finance. The options are either a full ledger facility, where a 1-2 year agreement is put in place or a Selective Invoice Finance facility where individual invoices can be funded on an as needed basis.