A purchase order is an order form, issued by a buyer to a seller. When it’s accepted by the seller, it’s an agreement between buyer and seller on prices and quantities for a product or service.
Although a positive indication for a business, it can lead to problems for cash flow, primarily caused by two things.
Firstly, the business needs large funds to pay its suppliers to produce the goods for the order, a payment which is usually required prior to supplier production.
Secondly, the end customer usually has lengthy payment terms for the product they are receiving, in some cases this can be up to 120 days. Fulfilling this order requires the business to have substantial finance to fund production, until they get paid by the customer.
Purchase order finance provides funding for businesses with purchase orders to pay their suppliers and therefore smoothing out cash flow.