Purchase order finance is typically used by businesses that operate a buying and selling model. It is very similar to invoice finance and works where confirmed purchase orders can be used to secure finance for a company needing a boost in cash. Not only does it provide businesses with extra funding, but it also helps to demonstrate credibility.
How does it work?
A business receives a purchase order from a customer confirming their commitment to proceed with an order. This agreement will highlight payment terms which could mean a small deposit or a flexible payment plan over several weeks / months. It is these flexible payment terms which can cause cashflow problems. Therefore, the business receiving the purchase order can pass this on to a finance broker who will immediately arrange for payment, they will then arrange to collect the debt from the end customer at the end of the agreed payment terms.
Why use purchase order finance?
This type of finance is used simply to ensure that cash is not tied up in purchase orders. Having a firm commitment of purchase orders act a great boost for a business but waiting for payment can bring problems. Therefore, having access to immediate money and not having to worry about chasing up payment means the business can focus on running successfully and fulfilling all growth plans.
What is the typical duration of purchase order finance?
Generally, purchase order finance is considered a short-term solution as it ties in with the standard payment terms a customer would expect of between 30 to 90 days. As it is so flexible and can be used on numerous purchase orders it can be a fluid solution where one agreement comes to an end and another immediately begins.
What are the steps involved in a purchase order finance agreement?
- The business receives a new purchase order (PO) and calculates both costs and profits
- The PO is passed on to a finance company for payment
- The finance company evaluates the agreement and approves the funding
- The order is fulfilled and the customer receives delivery
- The finance company collects payment
- The agreement is complete and a new contract can be established when another PO is received
What are the main benefits of purchase order finance?
- It is a quick and speedy process to getting paid
- It is fully flexible and no restrictions on what the cash can be used for
- It reduces any issues with negative cashflow
- It eliminates debt from late payment
- It is perfect for growing businesses
To find our more about purchase order finance please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.
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