What Is Purchase Order Financing and How Does It Work?
P.O. financing is a funding option for businesses in the wholesale or distribution industry who lack the funds to fill orders they receive. Although this sounds relatively straightforward, purchase order financing is slightly more complicated than traditional invoice factoring. This is because the requirements to qualify are more specific than the requirements for accounts receivable factoring.
How Does Purchase Order Financing Work?
Once your company qualifies for purchase order funding, the actual process follows these steps:
- You will submit the purchase order to the P.O. funder you’re partnered with.
- The factor will directly pay the supplier for the purchase order.
- Once the supplier delivers the product, you will issue an invoice to the customer.
- You will sell that invoice to the factoring company in order to be advanced the money through accounts receivable factoring process.
- The invoice factoring company will pay the P.O. funder, plus fees, and then will advance the remaining invoice to you, minus the reserve.
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How to Qualify for P.O. Financing
If this funding option sounds like it could benefit your business, you might be wondering, “How do I qualify for P.O. funding?”
You must have:
- A gross profit for transactions must be at least 20%
- Experience with similar customers in a similar situation
- Your first transaction must be at least $100,000
- You must be able to provide qualified purchase orders or letters of credit