Purchase order financing is a financing method in which banks or NBFCs approve funds for a business to cover the cost of raw materials and production to complete a customer order. This practice helps businesses to get working capital to complete the order for which they don’t have enough funds.
The business pays back the financing when the customer clears the invoices. PO financing boosts the capability of a business to accept large orders without having enough working capital for it.
How It Works:
- The business receives a purchase order from a buyer.
- A lender finances the cost of fulfilling the order.
- Suppliers are paid to produce goods.
- Goods are delivered to the buyer.
- Payment from the buyer is used to settle the financing.
Benefits:
- Enables execution of large orders without upfront capital constraints
- Strengthens supplier relationships through timely payments
- Supports revenue growth by removing funding bottlenecks
- Reduces working capital pressure during order fulfillment
Example:
A company receives a Rs 10 lakh purchase order but needs Rs 6 lakh to manufacture the goods; purchase order financing can provide the funds needed to fulfil the order.