What Is Purchase Order Financing?

Purchase order financing is a type of lending that many small businesses use in order to help pay for purchase orders for products. Many small businesses have the ability to make sales, but they may not have the cash on hand to purchase the products that are necessary to fill those orders. Purchase order financing companies step in and offer these companies the cash that they need to purchase the materials for customers.

Lending Companies

There are a number of lending companies that provide this service to small businesses. Many times, these lending agencies will lend money to small businesses even if the businesses were unable to secure loans with traditional lenders. Because of this additional risk, a lending company will generally charge a higher amount of interest. 

Borrowing the Money

When a small business borrows money for purchase orders, it will pay the lender back after the customer pays it for the order. The purchase order financing company will make a margin on the transaction.

When a business gets in the habit of borrowing money for all of its purchase orders, getting out of this habit can be difficult. Some companies get into financial trouble by using this technique.