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Purchase Order (and Contract) Funding
A purchase order is a legal document for a promise to purchase goods at a specific price, quantity and usually consists of delivery instructions. Purchase orders that deal with services (instead of products) are usually referred to as contracts but are treated in very similar ways.
Small to medium sized businesses that are in a growth mode can be very successful at both qualifying and acquiring purchase orders and contracts. However, the challenge of filling orders in harmony with those PO's can be significant.
Growing businesses often need money in advance in order to produce the product or services identified in a PO or contract. The good news is that cash can be advanced in some cases so that supplies can be purchased which allows for orders associated with PO's and contracts can be filled. The ability to successfully obtain this type of financing can make a tremendous difference in the growth and prosperity of a company. The following information should help you to determine whether this type of financing will be beneficial to your companies needs.
Purchase Order Funding Illustrated
A purchase order is distinctly different from an invoice. However, the two often depend on one another (i.e. often times an invoice cannot be generated without a P.O., and, a legitimate P.O. will generate invoices when products or services are sold and delivered). For this reason, purchase orders and invoices are usually used in tandem when transacted by a funding source. In other words, if purchase orders are funded, the resulting invoices are also usually factored by the same funding source.
Purchase orders are simply "promises" to purchase goods whereas invoices are literal "assets" because they represent goods or services that have been both created and delivered. This difference highlights the risk between the two type of transactions in the sense that a P.O. is much riskier for a funding source to fund than for an actual invoice. For this reason, funding for the entire amount of a P.O. is usually not realistic unless unique circumstances exist which will significantly lower the risk involved.
Purchase Order Funding Illustrated
Purchase order funding is the process of having a third party (funder) advance money against the P.O. directly to the supplier of a client instead of to the client themselves. In other words, money is sent to the supplier for products (in advance) on the behalf of the client. This ensures that the clients is able to obtain its supplies in a timely manner and it also (due to the risks involved) helps to protect the investment of the funder. The full amount of a P.O. is rarely advanced and that ultimate amount is determined by the funding source. There are essentially two ways in which purchase orders are funded by a funding source.
For example, it is much easier for an established client to gain purchase order funding because of demonstrated trust and a healthy business relationship with a funding source who both funds PO's and factors invoices. Therefore, an existing relationship where "invoices" are already being factored (sold) with a funding source will likely develop into a P.O. funding relationship if required. Obviously, the level of comfort and the performance history of the client are key elements in a funding sources decision to fund the purchase orders of a client.
Also, for a funding source that specifically specializes in only funding purchase orders, a prior established relationship with a client may not be a pre-requisite. Such a funder may work in tandem with another funding source that is a "Factor" (buyer of invoices). This means that the P.O. funder will actually fund a purchase order in advance of delivery. However, once goods and/or services have been sold and delivered a second funding source (also called a "Factor") will step in and pay the P.O. funder for the amount advanced on the purchase order (including their fee for the service provided) while simultaneously beginning to factor all resulting associated invoices under the P.O.
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