What is Purchase Order Finance?
- Purchase order finance is commonly used for trading businesses that buy and sell; having suppliers and end buyers. Financing is on the basis of purchase orders that allow a shot of finance into a growing company – this type of facility is sometimes used or not known about by many companies and is at many times an alternative to investment. It also provides huge advantages when negotiating with suppliers and end buyers – gaining credibility within the transaction chain.
- Purchase order finance usually goes hand in hand with invoice finance, as purchase order financier is paid back by an invoice finance lender when goods are received by the customer.
Purchase Order Finance FAQ
How does the transaction cycle work and what documents are required?
- Using a toy manufacturer as an example – the buyer will come forward and raise a purchase order for goods. There will be a corresponding purchase from the supplier that will be paid by the funder. This can be done in various ways such as deposit and later full payment, cash against document or cash against a Letter of Credit. Goods are usually sent directly to the end customer and when the product arrives with the customer; an invoice is then raised. A funder will usually fund a percentage of this invoice that is raised to the end customer and will use the funds to pay down the trade finance line; which is usually a higher cost than the invoice finance line.
How does purchase order finance work?
- Purchase order finance is seen to be a number of things. There will be a commitment from a purchaser for goods and the question falls on how the supplier is paid. There could be the requirement for a deposit to be paid pre-shipment e.g. 30% on order and 70% upon shipment, there may be an agreement that all funds are paid against documents e.g. loading and title docs or it could be that there is an agreement to release goods against a letter of credit.
Why would you use purchase order finance?
- The aim of having a purchase order and an invoice finance facility in place is that a sustainable debt structure leaves the company to invest in cash flows, R and D and other non-trade related but cash intensive elements. This will permit expansion based on purchase orders and corresponding invoices with funding to match these requirements. This is unlike lending types such as bridging or other secured financing types whereby there will need to be an equity owned asset and there is funding against an element of that asset. Thus growth can be sustainable and unhampered. It also allows this growth to far exceed the cash values that the company have in their accounts and allows smaller companies to play at an elevated level.
- Finance in relation to purchase orders is usually short term – being 30-90 days and on average is usually 45 days per trade. It will usually be the most expensive element of a trade so the aim is to keep it short and it is usually paid down by a corresponding invoice finance line.
- It is important to look at the many trade finance solutions that are available along with the business need and sector. We do this and work together with you to try and create the most suitable solution.