Purchase order financing is an alternative way to obtain funding after receiving large purchase orders. A manufacturer or distributor may not have the finance to go into production after receiving a purchaser order. With purchase order financing, they can raise working capital on the basis of the order received.
PO financing and loans are a good solution for working capital requirements. These are specific loans granted under terms and conditions related to the product manufacturing, based on which the interest rate for the loan is determined. The payment could be upfront, contract based or depending on the duration of invoice payment.
PO loans are only short term loans, and allow a manufacturer to pay their suppliers and start production. Thus the small business owner need not refuse the order due to lack of finance, as the purchase order can be used to avail loan for executing the order.
The terms and criteria for PO finance specify the conditions that must be met by the borrower. These include terms such as restraint on making any changes in the products, and not engaging in manufacturing the same products as a business. There may be a 20 percent minimum requirement on gross margins, and suppliers too may be required to show a clean history.
Purchase order finance is suitable for order received in high value or volume. The loan allows accepting such orders and paying the supplier network to begin production. The process is quicker than taking out a conventional bank loan, and hence preferable. PO financing is an attractive way for small businesses to maintain a regular and healthy production cycle without being hampered by lack of finance.