Purchase Order Financing Explained

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In this series, we’ve been talking about non-traditional business financing. Last week, we talked about fintech loans and equipment leasing. This week, we are going to talk about PO (Purchase Order) financing. This is Judi Otton with GrowthCast and let’s dive right into it.

PO financing is a very specialized type of financing. This is typically used by companies that manufacture goods and then wholesale them to a retailer. So let’s pretend that you make widgets and you have gotten a purchase order or an order from Walmart for 100,000 of your widgets. Part of PO financing means that you have to have that order in place. Walmart has to have committed to buying those 100,000 widgets before you can entertain this kind of financing. Now, the way that it works is the financer will come in and will pay your supplier because say you need metal, wood, and glue to make your widgets, they will purchase those raw materials. Sometimes they will even cover the costs of the labor. So now you go, you make your widgets, you send them to Walmart and then the financer again will collect the money from Walmart, presumably more than you spent on raw materials and labor. They will pay your supplier and they will give you the rest minus their fees.

So this is great because you don’t have to put out any working capital to fulfill this big order. But the challenge with this lies in that first, they’re going to take a nice slice off the top of your profits. Second of all, they are in contact, they are the intermediary with both your suppliers and your customers. So, for many companies who want to maintain strong relationships with their suppliers and with their customers, which is something I highly recommend, you’re having this third party get in the middle of it. For companies that are growing all of a sudden got this fabulous 100,000 piece order from Walmart, this is a way to level up because you may or may not have the working capital to fulfill that order.

I realize that there’s a lot to this, so feel free to reach out with any questions. Next week, we’re going to talk about invoice factoring. So if you have any questions about that beast, put them in the comments and I’ll address them then. Again, this is Judi Otton with GrowthCast and I’ll see you next week for a new Fiscal Fitness Tip of the Week.

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