How Does Purchase Order Financing Work?

Business person filling out a purchase order. Convertibill® Finance

If you’re hoping to grow your business by taking on more customers and fulfilling more orders, using business finance can help. Purchase order finance is a solution that allows you to take advantage of growth opportunities while maintaining healthy cash flow. 

Here’s everything you need to know about how purchase order finance works and how you can use it to grow your business. 

What Is Purchase Order Financing?

Purchase order finance is an alternative business finance solution designed to help businesses grow by fulfilling more orders. 

Every business has a limit as to how many orders they can fulfil at one time due to limited equipment, resources or funds. Purchase order finance provides funding to cover the costs of orders, including manufacturing and transportation costs. This way funds aren’t tied up in pending orders.  You can also increase your business’ capacity to fulfil orders, and in turn, raise profit margins. 

What Types of Businesses Does Purchase Order Finance Work For?

Any reputable business can use this type of finance to sell goods to their customers. For example, manufacturers, wholesalers, and resellers can all benefit from using purchase order finance. 

Purchase order finance can be used to fund manufacturing costs, delivery or import and export costs or to purchase inventory to resell. For those purchasing products for resale from outside suppliers, purchase order finance can be used to negotiate bulk discounts or early payment discounts. 

Purchase order finance is useful in several scenarios. For example, if your business has seasonal spikes in demand, you might find the cost of orders during your peak season is something of a financial strain. Purchase order finance can alleviate that strain and allow you to fulfil as many orders as possible. The same goes if you’re experiencing unexpected growth or if you’ve suddenly had a particularly large order come in. 

How Does Purchase Order Financing Work? 

Before you can receive purchase order finance, you’ll need to have received a purchase order from a customer. A purchase order is a document from the buyer (your customer) requesting goods. The document will include details of what your customer would like to purchase, how much they’d like to order and the price agreed between you and the customer. 

You can then choose to accept or decline the purchase order. Purchase order finance can provide the funds to enable your company to accept order requests regardless of their size

Once you have a purchase order, you can apply for purchase order finance. And if approved, you can accept the purchase order which then becomes legally binding. Here’s what you can expect from the purchase order finance process in four simple steps. 

The Purchase Order Finance Process in 4 Simple Steps

1: Apply for Purchase Order Finance

Once you’ve received a purchase order from a customer, and you know how much the order will cost to fulfil, you can apply for purchase order finance. 

Alternative finance providers who know the importance of timely funds offer purchase order finance. You can usually apply online for this type of funding.  If you’re approved, you’ll receive funds within a few days. So you’ll be able to fulfil orders without delay. 

2: Your Finance Provider Will Pay Your Order Costs

Depending on the agreement you have with your finance provider, they will cover either a large percentage or the entire cost of your order. Your finance provider might pay your supplier directly so they can begin supply. Or, they could provide you with a cash advance so you can decide how to finance orders. 

3: Your Customer Receives Their Order

Once an order has been funded and fulfilled, it will be delivered to the customer. Your supplier can deliver the order to your customer, or you can have the product delivered to your business address to distribute. Your customer will pay your finance provider after they receive their order. 

4: Your Finance Provider Pays You the Profits

After your customer has paid for their order, your finance provider will deduct their fee from the profits and pay you the remaining balance. This may be extent of your relationship with your finance provider. Or, if you’d like to fund more orders, you can continue working with them. That’s the beauty of flexible finance solutions — you’re not locked into contracts and you have control over how you grow your business. 

Convertibill offers flexible purchase order finance to businesses looking to grow and reach their full potential. Contact us today for more information or to request a quote.