Purchase order (PO) finance

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u003cem data-rich-text-format-boundary=u0022trueu0022u003ePurchase order finance, or ‘PO Finance’, is a type of funding to help business pay their suppliers and aid their u003ca href=u0022https://swoopfunding.com/uk/business-glossary/cash-flow/u0022u003ecash flowu003c/au003e. This works as an advance to a supplier (from a finance provider) secured against a confirmed purchase order. It removes some of the financial pressures of fulfilling an order – especially a large order – by helping finance a transaction up until the time you raise an invoice.u003c/emu003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cemu003e u003c/emu003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eThe purpose of finance is to allow the fulfilment of an orderu003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eThe amount borrowed can be up to 90% of the value of the purchase order- the amount depends on the size of the order ( i.e. the amount owed to you) and the credit worthiness of the company issuing the order.u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eTerms range from 30, 60, 90 or 120 days.  The cost is between 1.8% and 6% per month with 1-2 weeks to access capital.

How does purchase order finance work?rnu003culu003ern tu003cliu003eYou accept a purchase order (i.e. the form a buyer issues to a seller – your business is the ‘seller’ and your customer is the ‘buyer’)u003c/liu003ern tu003cliu003eThe purchase order becomes a legal contractu003c/liu003ern tu003cliu003eYou submit the purchase order to the PO financing company for approvalu003c/liu003ern tu003cliu003eThe PO finance provider pays the supplier at cost – this payment enables your supplier to manufacture the product and deliver it to youu003c/liu003ern tu003cliu003eYou send an invoice to your customeru003c/liu003ern tu003cliu003eYour customer pays youu003c/liu003ern tu003cliu003eYou settle with your PO finance provider – you pay a transaction fee and interest on the money they advanced to your supplier. (You can usually use invoice finance to pay your PO finance provider if you prefer.)u003c/liu003ernu003c/ulu003ernIt’s interesting to compare PO finance to u003ca href=u0022https://swoopfunding.com/knowledge-hub/invoice-factoring/u0022u003einvoice factoringu003c/au003e and u003ca href=u0022https://swoopfunding.com/knowledge-hub/invoice-discounting/u0022u003einvoice discountingu003c/au003e, where the lender advances you cash after you’ve invoiced your customers – the cash advance is secured against these invoices (usually up to 90% of their value). In other words, this cash is advanced ‘post-delivery’ – once your customer has received your product or service. Once the customer has paid in full, your lender will send you the remaining balance minus their fees. By contrast, PO finance is ‘pre-delivery’.

You can use purchase order finance if you are a product distributor or reseller and need finance to fulfil a specific order. You can’t use PO finance if you directly manufacture products or if you just want to build inventory.u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eA minimum of two years of trading and £50,000 of revenue is required.

You might want to consider u003ca href=u0022https://swoopfunding.com/knowledge-hub/supplier-finance/u0022u003esupplier financeu003c/au003e, which is also ‘pre-delivery’.u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eSupplier finance has two main advantages over PO finance:rnu003culu003ern tu003cliu003eyou can use it if you are a manufacturer (unlike PO finance)u003c/liu003ern tu003cliu003eyou can use it alongside existing financing (e.g., a line of credit) because it doesn’t encumber assets (by contrast, a PO finance transaction is secured by your accounts receivable so may not work if you already have a lender in place (unless they subordinate their position).u003c/liu003ernu003c/ulu003ernHowever, supplier finance comes with a limitation: your finance provider can buy products on your behalf only up to the amount that your business can be credit insured. So you might not be able to use supplier finance for very large orders – this is where PO finance has the edge.u003cbr data-rich-text-line-break=u0022trueu0022 /u003eu003cbr data-rich-text-line-break=u0022trueu0022 /u003eAlso consider:rnu003culu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/asset-based-lending/u0022u003eSelective invoice financingu003c/au003eu003c/liu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/invoice-discounting/u0022u003eInvoice discountingu003c/au003eu003c/liu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/invoice-factoring/u0022u003eInvoice factoringu003c/au003eu003c/liu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/selective-invoice-discounting/u0022u003eSelective invoice discountingu003c/au003eu003c/liu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/spot-factoring/u0022u003eSpot factoringu003c/au003eu003c/liu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/confidential-invoice-finance/u0022u003eConfidential invoice financeu003c/au003eu003c/liu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/confidential-invoice-factoring/u0022u003eConfidential invoice factoringu003c/au003eu003c/liu003ern tu003cliu003eu003ca href=u0022https://swoopfunding.com/knowledge-hub/chocs-customer-handles-own-collections/u0022u003eCHOCs, short for Customer Handles Own Collections,u003c/au003eu003c/liu003ernu003c/ulu003e

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