What Makes a Purchase Order a Legal Contract?
Is a PO Agreement Legally Binding?
Understanding a Purchase Order versus a Contract when ordering Goods or Services.
Purchase orders and contracts are legally binding agreements in business transactions. Understanding the differences between the two is crucial. This article provides definitions, differences, and information on purchase order funding and how it relates to invoice factoring.
How is a Contract Defined?
A contract is a legally binding document that outlines the agreements between two or more parties. It includes an offer made by one party and accepted by the other, where something of value is exchanged.
Contracts set expectations and provide legal protection if violated.
Expand your understanding with our article whether an invoice is a legal contract.
How is a Purchase Order Defined?
Much like how all squares are rectangles, but not every rectangle is a square, all accepted purchase order agreements are contracts, yet not every contract is a purchase order agreement.
A purchase order, once accepted by the seller, is a type of contract – and this is the relationship between the two. How do you end up with perfect goods or services? It starts with a perfect purchase order. A well-written purchase agreement mapping out the purchasing process reduces risk exposure to all parties involved.
Purchase Orders and Vendor Agreements Map Out the Complex Set of Terms
A purchase order, or PO, is a document sent from a buyer to a seller to request a product purchase. It includes details such as quantity, prices, product types, payment terms, return policy, and delivery information. Purchase orders help sellers understand buyer preferences, similar to adding items to an online cart.
A common misconception is that all purchase orders are for a period of time. However, blanket purchase orders need close monitoring to avoid purchase departments overordering and missing renewal steps. Office supplies commonly utilize blanket purchase orders, but caution is necessary to prevent over-ordering and excess supplies due to a decrease in office personnel.
Once the seller accepts this purchase proposal, the purchase order becomes a legally binding contract. The seller must follow the terms of the purchase order and deliver the product, while the buyer must submit the payment.
Read our previous article the pros and cons of invoice factoring, as it ties into the purchase requisition process.
Purchase order contracts provide clarity for buyers and sellers, reducing liability by clearly stating the transaction guidelines under legal terms.
We also have a robust government contract financing program.
What is Purchase Order Financing?
When your business is familiar with the satisfaction and excitement of receiving a large purchase order, yet also familiar with the stress and headache of wondering if youโre going to be able to have the funds to meet it, PO funding could be right for you.
Purchase order financing is when businesses receive large purchase orders that they cannot cover the cost of, and companies that provide PO funding like Bankers Factoring provide financial support by covering the manufacturing and shipping costs, allowing the business to leave financial struggles behind and complete the order.
Read purchase order funding & trade financing from Bankers Factoring.
Example of PO Financing
Say your company sells guitars. Guitar Center sends you a large purchase order for your guitars, yet you donโt have enough cash flow to cover the materials for the order and buy your product from your manufacturer. An order this large would greatly support your business, yet youโre not sure how youโre going to be able to fulfill it.
A PO funding company like Bankers Factoring will address and remedy this issue with the simple solution of buying the guitars for you or using our credit to arrange terms with your supplier.
Read our full guide to purchase order financing, and find your questions answered even further.
How Purchase Order Financing Relates to Invoice Factoring
Once your company has the guitars you need to fulfill your order to Guitar Center, and your product has been successfully delivered, an invoice on 30-90 day payment terms has subsequently been created. This invoice can now be factored with invoice factoring, a simple process that involves selling your invoices to a factoring company like Bankers Factoring.
Also, understand how Bankers Factoring provides protection from non-payment and the resulting bad debt with the security of non-recourse invoice factoring.
We will convert this newly created invoice into immediate, safe, and reliable working capital, all within the remarkably quick turn-around of same-day funding after our simple approval process, allowing you to leave problems of slow payment in the past.
Understand more with our comprehensive guide to factoring invoices.
The processes of purchase order financing and invoice factoring work together harmoniously to provide your business with financial support every step of the way, and Bankers Factoring is proud to have the privilege to offer both services to your growing business.
Learn more about our award-winning A/R factoring program with our article why companies use A/R factoring.
What Businesses Benefit from PO Financing?
There are a few specific businesses that will benefit the most from PO financing.
- Wholesalers
- Distributors
- Importers
- Outsourced manufacturers
- Resellers
Learn more about why Bankers invoice factoring to bridge gaps in cash flow.
Does PO Funding Make Sense for Your Business?
When your business has found increased demand for your product or service when youโve taken on larger orders and clients, and constraints in your cash flow when youโre not finding yourself with sufficient cash on hand, PO funding allows your business to receive the financial assistance you need and be able to meet customer orders.
As PO funding also covers shipping costs, businesses that work with international suppliers with high shipping fees can find benefit in having these steep, yet essential expenses covered.
Read our PO financing spreadsheet to learn more about if PO funding with Bankers Factoring makes sense for you.
When you discover the benefits of PO funding, find out if your business meets the qualifications listed below.
Who Qualifies for Purchase Order Funding?
- Sell to credit-worthy B2B or B2G Customers
- Have a minimum gross profit of at least 20%
- Have experience with similar products and comparable clients
- Transactions per month of no less than $40,000
- Physical goods that have been completed and are intended for sale
- Provide qualified purchase orders or letters of credit from your customers
- Payments from your customers come to Bankers Factoring
Understand more with our article what is trade financing.
Purchase Orders vs. Contracts
Understanding the differences between purchase orders and contracts is important. In this article, we explored what they are and how purchase order financing relates to invoice factoring.
When struggles with cash flow continuously plague small and medium-sized businesses like yours, find the solution with invoice factoring and purchase order financing from Bankers Factoring. By combining invoice factoring and purchase order financing, two fantastic financial tools that support cash flow and maintain financial health, Bankers Factoring is able to provide ultimate security and peace of mind for your business.