Purchase order finance (PO Financing) is a method of financing inventory, but under a fairly specialized and narrow set of conditions. It is commonly combined with factoring, but can be done separately.
The terms of the purchase order determine the feasibility of using purchase order finance. A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. A purchase order is used to control the purchasing of products and services from external suppliers. Sending a purchase order to a supplier constitutes a legal offer to buy products or services.
Acceptance of a purchase order by a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the purchase order is accepted. At that point, the purchase order becomes a contract that can be enforced and assigned. The legally binding nature of the purchase order, combined with the specificity of the terms, permits a p.o. financier to take an assignment of the purchase order in connection with the financing of the underlying goods.
P.O. financing is a valid short-term solution to a liquidity problem caused by an unusually large order with a solid gross margin. A longer term liquidity problem is better solved with either mezzanine or equity capital.
The ideal conditions under which you can obtain financing for acquiring inventory are as follows:
- You purchase finished goods
- The finished goods are drop shipped to the customer
- You don’t need to take possession of the inventory after it is manufactured
- There is no additional work needed on the inventory
If you are having difficulty finding financing for the fulfillment of orders, talk to us about PO finance.
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