How To Use Purchase Order Financing

Companies that need to get funds to start work on a large order often turn to purchase order financing because it is similar to another form of cash advance that they are likely to be familiar with, factoring. Where the latter is based on invoices billed after the work is done, the former allows you to access some of the order’s value before you even start.

This can be incredibly useful even if you generally prefer to rely on invoice financing. By financing an order with its own value, you create a situation where you never have to turn down large orders due to working capital shortfalls. That means you never have to refer a big opportunity to the competition.

Applying for Financing

Putting together your purchase orders and other financial information is the first step. The requirements are similar to invoice financing. You need to include substantiation of your business income, tax ID and other identifying information, and anything else requested by a program’s specific directions. Applications are designed to be simple, since working capital financing is designed to be fast.

Unlike traditional business loans and some credit lines, you do not need a business plan or other lengthy forms of documentation to apply for purchase order financing. You just need purchase orders and basic financial disclosures to substantiate client payment histories when requested.

How Repayment Works

As with factoring, you need to direct customers to pay the financing company instead of your business. The communication should stress that the customer’s account is in good standing and this is an administrative streamlining move on your part, just to avoid ill will due to possible misunderstandings. After customers pay, if there is a remaining balance beyond the fees and advance amount, you may receive an additional payment, just like with invoice financing.

Using Purchase Orders for Cash Flow Management

If your shop regularly gets large orders from major clients, you can design procedures for financing those orders that include price adjustments to keep your bottom line the same. The result is that your cash on hand only needs to cover supplies and labor for smaller jobs, allowing you to make sure that the customers who keep your doors open are never kept waiting.

It’s a great way to keep your cash flow obligations in order, but only companies in manufacturing or trading niches that work with purchase orders qualify. If that sounds like your business, consider this as an alternative to traditional invoice financing the next time you need working capital.