Purchase Order Financing
Definition
Purchase order (PO) financing is a funding solution that provides capital to pay suppliers for goods that have already been ordered by a creditworthy customer. When a business receives a large purchase order but lacks the cash to fulfill it, a PO financing company pays the supplier directly (up to 100% of supplier costs). The business delivers the goods, invoices the customer, and the PO financing company is repaid from the proceeds. This type of financing is ideal for wholesalers, distributors, importers, and manufacturers who win large orders but don't have the working capital to fulfill them.
Example
A distributor receives a $500,000 order from Walmart but needs $350,000 to buy the products from their manufacturer. A PO financing company pays the manufacturer directly. The distributor ships to Walmart, invoices them, and when Walmart pays, the PO funder takes their fee (typically 1.5–6%) and the distributor keeps the profit.
Related Terms
Invoice Factoring
Invoice factoring is a financing arrangement where a business sells its outstanding invoices (accoun...
Working Capital
Working capital is the difference between a business's current assets (cash, accounts receivable, in...
Net 30
Net 30 is a payment term indicating that the full invoice amount is due within 30 calendar days of t...
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