What is Purchase Order Finance & How Does It Work?

Purchase Order Finance gives businesses access to funds to pay their suppliers before invoicing the buyers. For example, a business receives a large order from a buyer, however, the business does not have enough cash on hand to pay the supplier upfront. To alleviate the cash flow issue the business makes use of Purchase Order Finance to access to temporarily liberate the cash trapped in the transaction.

What industries is this form of finance suited for?

The industries that are typically suited for purchase order financing are those entities that find themselves having to fund large orders from suppliers in-house. A classic example is instances where the goods that to be purchased have to be imported or bought in cash. The business relationship may also be not bound to the domestic border. Purchase Order Finance also applies to international / cross-borders orders. Some industries are:

• Manufacturing

• Retail

• Import/export

• Distribution

The growth of alternative lenders such as Thrifty Money has made Purchase Order Financing a funding option worth considering as quite often a substantial part of the finance cost can be subsidized by a negotiated cash purchase discount, making the nett finance cost easily absorbable.

How it works in practice.

Typically a transaction would flow as follows:

1. You receive a large purchase order from a creditworthy customer;

2. You then raise the funds required against the purchase order, offering the payment obligation created by it as collateral/security for the loan;

3. Once the goods have been delivered to the buyer you raise the appropriate invoice, collect the payment and repay the loan and related charges.