For suppliers · Explainer
How does purchase order financing work when I have an order but no cash to fulfill it?
Funding against a confirmed order before the goods are made or shipped, settled out of your anchor’s payment once it has accepted delivery, with full recourse to you, so if delivery is not accepted or the order is canceled you repay the advance.
In short
- Funding against a confirmed order, before the goods are made or shipped.
- Everything turns on your anchor accepting the goods: under the documented terms, if it does not, you repay the advance.
- A security interest over the order and its goods is registrable, so ask what your program takes before you draw.
When it fits
A confirmed purchase order from your anchor, and not enough cash to buy materials, pay the workshop or fund the production run. This is the point in the cycle where a business is most often stuck: the order is real and the cash to fulfill it is not. Purchase order financing funds the order itself, before there is an invoice.
How it moves
You apply against your anchor’s confirmed purchase order, with a proforma invoice from each of your vendors, the businesses you buy materials or goods from. Once you accept the offer, the money goes to your vendors under the financier’s guarantee, not to you, after your anchor confirms delivery. Your anchor then pays on its normal terms, and the financing and its charges are settled out of that payment. The diagram below draws the same steps.
Full recourse, and security
Under the documented terms, purchase order financing is with full recourse: if delivery is not accepted, the order is canceled, or the proceeds fall short, you repay the advance and charges on demand.
A security interest over the financed order, the goods produced under it and their proceeds is registrable under this product. What is actually taken in your program is set out in your financier’s agreement: ask before you draw, and do not assume nothing is pledged.
Acceptance is the hinge
Everything turns on your anchor accepting the goods. Under the documented terms its obligation to pay arises only once the goods are delivered and accepted under your contract. The letter of undertaking routes that payment; it is not a guarantee, and it does not move the obligation to repay off you. A rejected batch or a canceled order does not cancel the advance.
What it costs
A guarantee charge, paid before the guarantees go to your vendors, and a charge on the financing, settled when your anchor’s payment comes through, rather than a discount on an invoice. Under the documented terms you see the product, the amount payable to you, every deduction and the effective annualized cost before you accept.
Before you ask for it
Be honest about the delivery risk you are taking on, because under this product it is yours. Confirm the order is firm, the specification is agreed, and your anchor’s acceptance process is one you have passed before. Then read the product page, which states who owes the money and carries the documented terms.
The flow, step by step
- Money moves
- A document moves
- Goods move
- 1.Anchor: places a confirmed purchase order for goods that are not yet made or shipped. (a document moves to supplier.)
- 2.Supplier: applies for funding against that order, with a proforma invoice from each vendor it buys from to fill it. (a document moves to financier.)This is the point in the cycle where a business is most often stuck: the order is real and the cash to fulfill it is not.
- 3.Anchor: confirms the purchase order and signs its letter of undertaking. (a document moves to financier.)The letter of undertaking routes the anchor’s payment; it is not a guarantee.
- 4.Financier: sends each vendor a guarantee that it will be paid once delivery is confirmed. (a document moves to vendor.)Paying vendors under guarantee, only once delivery is confirmed, is how the financier manages the risk that the order is not filled.
- 5.Vendor: supplies the materials or goods for the order. (goods move to supplier.)
- 6.Supplier: delivers the goods, and the anchor accepts them and confirms the delivery note. (goods move to anchor.)Acceptance matters: the anchor’s obligation to pay arises only once the goods are delivered and accepted.
- 7.Financier: pays the vendors, once the anchor has confirmed the delivery note. (money moves to vendor.)The money goes to your vendors, not to you, and the financing is booked in your name.
- 8.Supplier: invoices the anchor for the accepted goods. (a document moves to anchor.)
- 9.Anchor: pays the invoice on its normal terms, and its letter of undertaking routes that payment to the financier. (money moves to financier.)The financing and its charges are settled out of that payment.
Who owes the money: You, the supplier: full recourse. If delivery is not accepted, the order is canceled, or the proceeds fall short, you repay the advance on demand. The anchor’s letter of undertaking routes payment; it is not a guarantee.
Next in this track
What is reverse factoring, and why is it priced on my anchor’s credit rather than mine?