Purchase Order Financing

Purchase Order Factoring: When Businesses Are Presented Large Purchase Orders

It is every business’s dream to grow and prosper but when some businesses are presented with a very big purchase order, they occasionally face financial difficulty. For one, the purchase order is a paper trail of saying that a specific company wishes to purchase ‘x’ amount of the manufactured item. However, there is no money that accompanies this piece of paper and therein is where the problems begin. While the business is forced to either turn down the prospective new customer with the purchase order or max out available lines of credit or credit cards. Finding a realistic avenue of financing becomes inherently important and this is where purchase order factoring comes into play.

Many businesses that face this situation don’t have enough business history or credit history to secure enough of a line of credit to get the job done. A potential job that is so big that the business doesn’t have enough working capital to cover can potentially make or break a business. The good news is that if the company that has issues the purchase order is a good standing business with a history of good credit, purchase order factoring could be the ticket to expanding.

The purchase order factoring company will advance money to the business to purchase the inventory required to fulfill the purchase order. Some purchase order factoring companies will not advance actual cash but will send a Letter of Credit to the supplier that the business will be acquiring supplies from. The business is then free to get the supplies from that company with the purchase order factoring company verifying that they will be paid for all supplies. Once the purchase order goods are manufactured and delivered, the company is invoiced for the total cost of the purchase order.

It is clear to see that purchase order factoring is a bit more complex than the traditional invoice factoring. It is a process that is done in several steps in order to acquire the working capital that is needed to complete the purchase order. The purchase order factoring company doesn’t get paid until the purchase order is finished and delivered to the customer. This is the very reason that this process is a much more selective one that standard invoice factoring. Invoice factoring already has the funds except it is waiting for the invoices to be honored. Purchase order factoring is working on the premise that goods will be delivered on time, to the buyer’s satisfaction to secure payment. This increases the substantial risk involved with purchase order financing.

Weigh out all solutions when it comes to getting a purchase order that seems too big for the bill. There are many options available and purchase order factoring is one of many. Be reassured in knowing that the practice of factoring has been around for hundreds of years and has provided financial solutions when banks say no.