Purchase order financing (PO financing) is an advance from a financing institution that pays your suppliers for goods you’re reselling or distributing to a customer. Purchase order funding requires a written purchase order. You can finance up to 100% of the purchase order costs, with typical rates falling between 1.15% and 6% per month.
If you have already delivered the goods and have outstanding invoices from another business or the government you could qualify for up to $5 million in invoice factoring from BlueVine. Rates start at just 0.25% per week, while the invoice is outstanding which is less expensive than purchase order financing and the funding speed is also much faster. The application is available online and can get you funded in one business day.
What Purchase Order Financing Is
Purchase order financing helps businesses fulfill product orders. Using PO financing allows you to finance payments to your suppliers for manufacturing and transportation before you receive payment from your customers. You can’t use the funds for anything other than the purchase of specific goods to fulfill your customer’s order, unlike other working capital loans.
To qualify for purchase order financing, you must sell finished goods (not raw materials or product components) to business-to business (B2B) or business-to-government (B2G) customers with profit margins of at least 15%. Even startups can qualify for purchase order funding because approval is based primarily on the creditworthiness of, and your history with, your customers and suppliers. Your chances of being approved are even greater if your customers and suppliers are well-established, reputable companies.
PO financing is a great way to help your business grow without taking on bank debt or selling equity in your company. If sales outpace your incoming cash flow, then purchase order financing might be a good fit to fulfill a new customer order.
Keep in mind, financing is funding you receive before you’ve delivered goods to your customers and before you’ve invoiced them. If you’ve already delivered goods or services to a B2B or B2G customer and invoiced that customer, invoice factoring is the right option, not PO financing.
Who Purchase Order Funding Is Right For
Purchase order funding is best for businesses that resell goods to their customers. This includes distributors, wholesalers, resellers, and outsource manufacturers. It’s also useful for importers and exporters because the cost of transportation can often be covered within the financing offer. It’s best for taking advantage of growth opportunities, while maintaining a healthy cash flow, which can be helpful for a business that is expanding.
Companies that use purchase order financing include:
- Distributors: Distributors can reduce their upfront costs while meeting the demands of buyers for high-margin products, especially during peak seasons, by using purchase order financing. This helps distributors maintain more inventory and offload some of the transportation costs that often reduce working capital available for investment.
- Wholesalers: Wholesalers can take advantage of increasing customer demand without depleting their capital or having unsold inventory. By financing the purchase and delivery of those products when they already have a customer, wholesalers can reduce some of the risk associated with keeping products in stock.
- Resellers: Resellers can reduce the amount of inventory they carry, especially when they first open, to spend their working capital to cover business expenses like rent and payroll. Purchase order funding can free up additional cash flow and allow the reseller to take on more customers, rather than investing funds in inventory.
- Importers or exporters of finished goods: Importers and exporters are faced with high transportation costs for their products. By financing a purchase order, they are able to avoid locking up their money while they wait for goods to arrive.
- Outsourced manufacturers: Outsourced manufacturers can use PO financing to continue to grow if they are short on capital but demand for their products is high. Rather than tying up funds in the manufacturing process, your business can reinvest in the company and finance the supply and delivery of goods.
Most businesses that rely on outside suppliers for the products that they resell can benefit from purchase order funding. This is because you’ll be able to grow the business and onboard new customers without tying up your cash in pending orders.
When Purchase Order Financing Is Right
Purchase order financing is best when your business is experiencing seasonality, substantial growth, or consistent cash flow shortages. Financing can help small businesses better take advantage of growth and seasonality by providing the necessary funding to meet the needs of their customers. It can also help relieve and even solve cash flow problems by reducing the amount business owners need to invest up front.
Purchase order financing can help you with various scenarios that include:
- Seasonal sales spikes: At the beginning of a seasonal sales spike, you may receive purchase orders that exceed your existing working capital. Small business purchase order funding can help you meet the needs of your customers without taking out expensive loans.
- Substantial growth: If your sales growth is outpacing an existing small business line of credit, then you may be a good candidate for PO financing. In this case, purchase order financing can extend more credit when a business line of credit runs out.
- Consistently tight cash flow: Many small businesses have cash flow problems at specific points of the month consistently. Using PO financing can help smooth out the tight cash flow and provide business owners with the funds to invest in their business.
This is not an all-inclusive list of when purchase order financing might work, but instead, are some of the most common reasons it is chosen as a fast business financing solution. Many of these scenarios can also be solved by using a small business line of credit through a loan provider like BlueVine.
Is purchase order financing right for you? Take our quiz. This two-minute quiz will show you which financing options may be best for you.
How Purchase Order Financing Works
Purchase order financing involves a minimum of four different parties who can complicate it at different points in the process. These include the company seeking financing (borrower), purchase order funding company, supplier, and customer. The process, puts the lender between you and the supplier to get the goods and then between you and the customer when payments are made.
The parties involved in a purchase order financing transactions are the:
- Borrower: This is the one seeking financing.
- Financing company: This is the company providing financing. The PO financing company evaluates the purchase order and provides funding to the supplier.
- Supplier: This is the company supplying the goods the borrower resells or distributes. The supplier receives payment for the goods directly from the purchase order financing company.
- Customer: This is the borrower’s customer and the ultimate recipient of the order. When PO financing is utilized, customers typically remit their payments directly to the purchase order financing company.
Since so many parties are involved, it can be more difficult to complete the financing process and keep costs down. For example, if your suppliers are slow to manufacture goods, then your costs will go up because you’ll be paying for the additional manufacturing time in financing fees. Plus, you’ll have additional costs associated with any terms you’ve offered your customers. The longer it takes for your purchase order financing company to get paid, the more expensive the funding.
Purchase Order Financing Process in 8 Steps
Purchase order financing can be understood if broken down step-by-step. After receiving an order from your customer and an estimate from your supplier, you can apply for financing. Your lender pays the supplier and collects from your customer directly, only giving you the difference after the transaction is completed and fees have been deducted.
The eight steps to a purchase order financing transaction are:
- Borrower receives a purchase order: The borrower receives a large purchase order from a customer.
- Borrower receives a written cost proposal: The borrower gets a written proposal from its supplier on what it would cost to purchase the goods necessary to fulfill the customer’s order. At this point, the borrower can determine with certainty if financing is necessary.
- Borrower applies and gets approved for purchase order financing: The borrower finds the right financing company, applies for the necessary funding, and gets approved. To apply, the borrower needs to provide both the customer’s purchase order and the supplier’s cost proposal.
- Financing company pays the supplier: Once the borrower is approved, the purchase order financing company pays the supplier to manufacture and deliver the goods needed to fulfill the purchase order. Payment is usually in the form of a letter of credit.
- Supplier delivers the goods to the customer: The supplier usually delivers the goods to the customer directly. However, the borrower may instead choose to have the goods delivered to its business location. Once the customer receives the goods the order is considered accepted.
- Borrower extends terms to the customer: The borrower invoices the customer for the goods and extends terms to the customer. The longer it takes to receive payment from the customer, the more expensive the financing becomes.
- Customer pays the financing company: The customer pays the PO financing company directly for the full price on the borrower’s invoice.
- Purchase order financing company pays the borrower after deducting fees: The PO financing company deducts its fees from the funds and then pays the remaining balance to the borrower.
In short, you purchase order financing company needs the details of the order to prepare your financing offer. Once the financing is acquired, your supplier can ship the goods to your customer. Once your customer receives the order, you’ll need to send them an invoice. This invoice is typically paid directly to the lender with any difference returned to you. With an understanding of the process, it’s important to evaluate the rates, terms, and qualifications before making a decision.
Purchase Order Financing Rates, Terms, & Qualifications
With purchase order financing you can get up to 100% of the cost of goods sold two weeks after you apply to fulfill a purchase order. Your B2B or B2G business needs to sell at least $15,000 worth of tangible goods with at least a 15% profit margin to qualify. The cost of this financing ranges from 1.15% to 6% per month with the financing company expecting repayment in 60 days or less.
PO financing companies provide up to 100% of the cost of goods sold in up to two weeks to fulfill a purchase order. Your B2B or B2G business needs to sell at least $15,000 worth of tangible goods with at least a 15% profit margin to qualify. Rates range from 1.15% to 6% per month with the financing company expecting repayment in 60 days or less.
The typical costs, terms, and qualification requirements you can expect from a financing company are:
Purchase Order Financing Rates, Terms & Qualifications at a Glance
|Amount Financed||Up to 100% of the cost of goods to fulfill the purchase order|
|Time For Supplier to Be Paid||One to two weeks|
|Repayment Terms||60 days or less|
|Interest Rates||1.15% to 6% per month|
|Minimum Funding||At least $15,000|
|Borrower Qualifications||B2B or B2G business selling tangible goods, with 15% or greater profit margins|
|Customer and Supplier Qualifications||Both parties in a transaction need to be creditworthy|
General Purchase Order Financing Terms
With purchase order financing, you can fund up to 100% of the total cost of goods needed to fulfill a written customer order. The PO financing company will typically issue payment to your suppliers in one to two weeks via a letter of credit, although payment may be issued in cash on a case-by-case basis. Most purchase order funding companies will want to be repaid within no more than 60 days.
The general PO financing terms you can expect are:
- Amount financed: Up to 100% of the cost of goods to fulfill the purchase order
- Repayment terms: 60 days or less
- Time to funding: One to two weeks until the supplier is paid
You’ll need to provide the financing company with a copy of the purchase order submitted by your customer and documentation from your supplier of what it will cost to fulfill the order when you apply. It’s important to consider how much time it will take you supplier to manufacture or provide the goods after they’ve received payment, as the longer it takes the more expensive the funding costs.
Purchase Order Financing Costs
Purchase order financing is an expensive short-term funding solution. The fees vary based on the volume and risk of the transaction to the financing company. Most of the best purchase order financing companies charge a percentage of the financed amount for the first 30 days in repayment. The costs vary industry wide from 1.15% to 6% per month.
After the first month, a financing company often charges rates in one or 10 day intervals. The costs after the first month are not made as clear by individual financing companies, but the industry average for these additional costs are about 1.00% per 10 days.
According to Commercial Capital, a PO financing company, the following cost examples are common if you’re approved for a 3% financing rate:
|First 30 Days||After First 30 Days|
|Model 1||3%||1% per 10 days|
|Model 2||3%||0.1% per day|
|Model 3||2% for 20 days, then 1% per 10 days||1% per 10 days|
You’ll notice all of these options have a similar cost for a 30 or 60-day term, but are broken up differently depending on when your customer pays. The quicker your customer pays your invoice (in most cases, after delivery or later) the less expensive purchase order financing becomes.
The loan term begins when your supplier is given the funds. This makes it an expensive option if your supplier is slow to manufacture or deliver goods, or if you’ve promised your customer payment terms longer than 30 days. Both of these things can impact how much PO financing will cost your business.
The table below shows an example of what purchase order financing could cost you. We assume the loan in the table is paid by your customer in exactly 50 days and you qualified for a 3% interest rate.
Purchase Order Financing Cost Example
|1st Month Cost||$3,000 (3%)|
|2nd Month Cost||$2,000 (1% per 10 days)|
These costs are comparable to other alternative business loans, if paid back in the same time period. One example is a short-term business loan from OnDeck or Kabbage which have an average APR of 42%.
Purchase Order Financing Qualifications
It’s pretty easy to qualify for purchase order financing as long as you deal with established and reputable customers and suppliers. Even newer businesses can qualify if you have verifiable industry experience. The most important qualifications to meet are being a B2B or B2G business with orders for tangible goods for at least $15,000 at a profit margin of at least 15%.
The qualifications you can expect when applying for purchase order financing are:
- Type of business: B2B or B2G
- Type of products: Tangible finished goods intended for direct resale
- Minimum order size: Varies by provider from $15,000 to $50,000
- Minimum profit margin: Varies by provider from 15% to 25%
- Customer and supplier: Must be creditworthy, which typically means they need to have a good credit history as reported by Dun and Bradstreet (D&B)
The exact meaning of having creditworthy customers varies and depends on the loan provider you choose. Many loan providers will complete a commercial credit check of your customers through common credit bureaus like Dun and Bradstreet. At a minimum, your customers and suppliers should have a history of timely payments, no recent bankruptcies, and no history of serious litigation.
Where to Get Purchase Order Financing
Few financing companies only focus on purchase order financing, and only a limited number advertise it as a product. Many banks and financing companies that offer accounts receivable financing solutions may offer purchase order financing. Discuss PO financing with a traditional lender, to see if it’s available.
There are generally two types of financing institutions that offer purchase order financing:
- Traditional banks: Traditional banks don’t commonly advertise PO financing, but many will offer it as add-on financing for long-standing customers. If you have an existing banking relationship, then start the process of finding a loan provider by checking with the bank first as it can often offer better rates than other providers.
- Purchase order funding providers: There are other financing institutions that focus on accounts receivable financing or other lending solutions that will offer PO financing. These small business purchase order funding providers are primarily online lenders.
If you are considering the best way to get funding quickly and your business has outstanding B2B or B2G invoices, you can get invoice factoring for up to $5 million to help your business grow and meet the needs of your customers. The online application takes just a few minutes, and you can put the money in the bank as soon as the next business day.
What to Look For in a Purchase Order Financing Company
If you’re looking for the right PO financing partner, then you’re going to want to know some specific details about the lender’s history in PO financing, and what its typical costs look like. Asking questions about a providers experience and determining the extent of its communication with your customers, can help you select a lender.
Some of the questions you can ask potential purchase order funding providers are:
- How many transactions have they handled in your industry?
- How long have they been in business?
- What loan products do they offer? If PO financing is one of many products, do they have a team of specialists that exclusively work on purchase order lending?
- How do they pay suppliers and when? Is it through a letter of credit or through cash? Do they pay upfront or after the customer pays?
- What are their typical costs and what is the breakdown of those costs?
- What kind of background or credit check do they perform on your customers or suppliers?
- How do they receive payment from your customers?
- Do they have any communication directly with your customers?
The answers to these questions will give you a better idea of whether the product offered by any potential purchase order financing company will work with your business’s needs. Chris Curtin, the director of Paragon Financial Group, offers the following advice:
“When you’re looking for the right purchase order financing company, select someone with direct experience in your industry. As an example, one of the industries we have experience with is the wine and spirits industry. Our knowledge from an operational and legal standpoint in that industry makes us a strong fit and helps us better serve them and their clients.”
Pros & Cons of Purchase Order Financing
When deciding whether to apply for purchase order financing, it is important to consider some benefits and drawbacks. Compared to other financing options it has low qualification requirements and is very flexible for covering cash flow gaps. However, it can also be very expensive, is only available for short-term funding, and requires your customer to work directly with your lender.
Pros of Purchase Order Financing
The benefits of purchase order financing are:
- Low qualification requirements: Purchase order funding companies don’t require you to have an established business or a high personal credit score. However, PO financing companies will check the creditworthiness of your customers before approving any funding.
- No personal guarantee requirements: Unlike a business loan or line of credit, PO financing does not usually require you to provide a personal guarantee when you accept funding. However, depending on how your business is structured, you may be on the hook in the event of default.
- Flexible for covering cash flow gaps: The flexibility for covering cash flow gaps is an outstanding benefit of PO financing. By freeing up cash that would otherwise be invested in goods in transit, your business can invest the money where it’s most needed.
Cons of Purchase Order Financing
The drawbacks of purchase order financing are:
- Potentially high costs: At first glance, the rates for PO financing may appear low, but they are quoted on a monthly basis. With each of the parties able to delay the delivery of payments and goods, your costs will increase quickly, making the financing more expensive.
- Only available for short-term funding: Purchase order funding companies expect to be paid by your customer within 60 days of providing funding. Compared to a business loan that can be paid over three years, this is a short-term funding option.
- Requires customers to work with your lender: By using PO financing, your customers will need to pay your lender directly. In many industries where purchase order financing is common, this won’t be a problem. However, you should consider the potential risk to your business’s reputation that could result from the direct relationship.
Alternatives to Purchase Order Financing
Purchase order financing is an expensive funding option for small businesses. As an alternative, qualifying borrowers can receive short-term business loans for large one time purchases. They can also factor B2B and B2G invoices to increase cash on hand and fund growth. Finally, inventory financing is a great option if your business is seasonal or growing quickly and needs inventory to meet customer demand.
Some good alternatives to purchase order financing are:
Short-Term Business Loans
Short-term business loans can be a great financing option for one-time expenditures like purchasing inventory or machinery. The best short-term loans have an online application and can get you funded in one business day for up to $500,000. It’s typically best for large one-time purchases, due to its longer repayment terms and large funding amounts.
With outstanding B2B or B2G invoices, businesses can access funding with invoice factoring. The best invoice factoring companies advance up to 90%, and will sometimes collect invoices directly from your customers. They can even help with delinquent invoices to get your business on track.
Inventory financing allows small businesses to purchase inventory in anticipation of busy seasons and growth. You can receive a term loan for large one time purchases, or a line of credit if your inventory financing needs are more unpredictable. You can get up to $500,000 in funding in as little as one business day.
Business Credit Cards
Business credit cards are a great funding tool, regardless of your other financing options. The best business credit cards offer small businesses rewards, perks, and low introductory rates on purchases.
Purchase Order Financing Frequently Asked Questions (FAQs)
In this article, we covered the process by which businesses can get funding through purchase order financing. Every business will encounter more nuanced questions when going through the funding process that will raise additional questions. We have gathered the most frequently asked questions about PO financing and answered them below. If your question was not answered, feel free to ask it in the Fit Small Business Forum.
The most frequently asked questions about PO financing are:
What is purchase order funding?
Purchase order funding is used by businesses that lack the funds to complete the orders of their customers. A purchase order funding company pays the supplier directly and collects the payment from the customer. Business owners are charged a fee and receive what’s left over from the transaction from the lender.
How does purchase order financing work?
Purchase order financing companies pay suppliers directly for goods based on a purchase order from a customer. The goods are then delivered to the customer and the payment is collected. The difference, less any fees charged by the lender, is then returned to the business owner that originally applied for financing.
What is the difference between purchase order financing and invoice factoring?
The biggest difference between purchase order financing and invoice factoring is when the funding is received and who receives it. With PO financing, the supplier is paid before the product is delivered to the customer. With invoice factoring, the customer has already received the product and the invoice factoring company funds the business directly.
Purchase order financing is good if your sales growth is outpacing your cash flow, but it can be expensive. For the best rates, we suggest you have profit margins above 20% with a long customer and supplier history. While it can help you take on additional customer orders, we don’t recommend purchase order financing unless you’ve exhausted other financing options first, especially if you’re a prime borrower.
As a prime borrower, you have several other financing options available to fund your growth. A BlueVine line of credit up to $250,000 can help you cover gaps in cash flows or fund smaller projects. Its invoice factoring facility can get you up to $5 million for your outstanding B2B or B2G invoices to continue growing.