Purchase Order Financing: What It Is & How It Works

Version 1: PO financing, also known as purchase order financing, involves a creditor paying your suppliers on your behalf so that the goods can be delivered to your customers. This type of financing is particularly useful when your business lacks sufficient funds to pay suppliers upfront, as it helps prevent delays in fulfilling customer orders. It is important to note that PO financing is applicable when selling finished goods to either a business (B2B) or the government (B2G).

The process is straightforward – the financing company reviews the purchase order and, upon approval, makes payment to your supplier for the goods. Once the goods are delivered, your client will then make payment to the financing company. The financing company will deduct its fee and issue the remaining balance to your business.

If you are certain that PO financing is the suitable option for your business, consider SMB Compass for your funding requirements. With SMB Compass, you can secure funding of up to $10 million in as little as seven days.

How Purchase Order Financing Operates
Understanding how PO financing works can be challenging due to the involvement of multiple parties. Additionally, there are several steps that need to be followed, including the evaluation of your application, the disbursement of funds, and the collection of payment.

Parties Involved in PO Financing
PO financing requires the participation of at least four distinct parties.

Your business: As the borrower, it is your responsibility to apply for PO financing on behalf of your business.
A supplier: The supplier is the entity accountable for delivering or providing the goods required to fulfill an order placed by your business’s customer. Typically, suppliers require payment before they can fulfill the customer’s order.
A customer: To be eligible for PO financing, your customer must be a business or government entity. Your customer will place an order with your business for specific goods, which will ultimately be supplied by your supplier.
A PO financing company: This company is responsible for providing funds to your supplier.