Purchase order funding is the buying and selling of
commercial purchase orders (received from business or government) at a
discount. It is used to finance
the acquisition of raw materials when a manufacturer has the insufficient
CASH of its own to complete an order.
WHY
USE PURCHASE ORDER FUNDING?
Inadequate financing
from other sources
The ability to pay bills
using future income.
Ability to handle larder orders.
FUNDING
PROCESS
The customer submits a purchase order
to the seller with all documents.
The seller submits the purchase order
to the purchase order funder for funding.
The purchase order funder makes a
partial payment on the purchasing order.
The payment is made to the seller’s supplier to cover the cost of the
materials on the seller’s behalf.
The supplier delivers the materials
for the production to the seller.
The seller produces and delivers the
products to the customer.
The seller also submits an invoice
corresponding to the purchase order to the factor.
The factor also submits the invoice to
the customer.
When the factor receives payment on
the invoice from the customer, the amount of the invoice advance and the
factoring fee are deducted and the remainder (the invoice reserve) is paid to
the seller.
FEES
Purchase order funding fees are higher than factoring
fees because of the higher risk involved. A factor is always involved in purchase
order funding is order to minimize cost.
