The practice of purchase order financing involves the use of short-term loans, focused on commercial borrowers, for the specific intent of purchasing inventory or supplies. These specific types of loans are intended to help out small businesses which have just started up and need cash to increase their sales.
A business who may be running low on cash may also seek to open one of these loans. Lenders of purchase order financing loans often place restrictions on the category of businesses that can take out these loans. They typically are businesses which operate mostly as importers, manufacturers, producers, suppliers, or retailers.
Larger lenders will give out loans worth a total of tens of millions of dollars, all for rates as low as 1.5% APR. Unfortunately, major lenders prefer to give out loans in large amounts, thereby forcing small companies to search extensively for the right lender. These businesses, unlike service or technology companies, need to have inventory and supplies readily on hand to operate efficiently.
To reduce a loan officers risk, they generally require that a purchase order or contract already be in existence for the full amount or more of the loan. They would not process a loan which a business owner has no possible way of paying back in the near-term. The items intended to be purchased must also be known, as the lender typically pays the inventory supplier directly. The credited money does not pass through the hands of the business taking out the loan.