Purchase Order Financing

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Definition

Purchase Order Financing provides entrepreneurs a means of paying a supplier upfront when cash-reserves are not available to fulfill an order. This type of funding is useful for growing companies who may secure a sale but lack sufficient funds to purchase the necessary supplies to fill the order. In this case, a purchase order financing company will supply funds directly to the supplier, typically using a letter of credit. When the end buyers of the product pay the company, the company then re-pays the purchase order financing company for the cost of the material, plus additional fees. Purchase order financing is sometimes thought of as a twist on factoring that has arose over the last few decades

Purchase order financing is particularly useful for wholesale companies that move product directly from supplier to buyer. The duration of the loan is typically 30 days and companies typically charge interest on the loaned money at rates as high as 3.5%/month (annual rate equivalent of more than 40%).
Historically, banks have offered some type of purchase order financing to their longstanding clients, though following the 2008 financial crisis they have become harder for business owners to secure through traditional bank lenders.