What is Purchase Order Financing?

Purchase order financing is a type of funding that your business can use to pay for the materials or goods needed to fulfill outstanding purchase orders.

This type of financing can be a viable option for businesses in a number of industries, including manufacturers, wholesalers, distributors and import/export companies.

What is purchase order financing?

Purchase order financing is a short-term financing method businesses can use to cover the cost of manufacturing or purchasing goods they’ve presold to customers via a purchase order.

Say you receive a purchase order from a customer for goods you don’t have in stock. To fulfill the order, you need to either manufacture the products or purchase them from someone else, but you don’t have the cash on hand to do either.

Rather than turning away business, a purchase order financing company pays your suppliers directly. Once you fulfill the order, you invoice the client and have them pay the finance company. Then the financing company sends you the payment (minus its fee).

This process allows you to fill orders without waiting for funds to come through from the buyer.

Purchase order financing costs

Purchase order financing can be costly, with fees typically ranging from 1.8% to 6% of the purchase order value per month.
That might not sound like a lot, but when you convert it to an annual percentage rate (APR), a 3.5% monthly loan rate works out to an APR of over 40%.

That’s quite a bit more expensive than some other business financing options. For example, the average interest rate on a traditional business term loan is around 8%, and the average APR on a credit card is nearly 25% as of November 2024.

How does purchase order financing work?

One way purchase order financing differs from a standard business loan is that there are more parties involved. A business loan involves only the lender and you, as the borrower. But with purchase order financing, there are four parties involved: your business, the purchase order financing company, your customer and the supplier.

Here’s an overview of how the process works:

• Your business receives an order. Your business receives an order from a customer, but you don’t have the cash or inventory on hand to fulfill it.
• You apply for purchase order financing to fill the order. You submit an application to the purchase order financing company.
• The financing company approves your application. Assuming the financing company approves your application, they may cover up to 100% of the supplier’s costs, depending on your supplier’s track record and your customer’s creditworthiness. Or they might approve you for only a percentage of funding. In that case, you’ll have to cover the remaining balance.
• The purchase order financing company pays the supplier to manufacture and deliver the order. The purchase order financing company pays your supplier directly, either with a letter of credit or cash. A letter of credit is a bank guarantee that the financing company will make the payment once the supplier meets certain conditions. In this case, the condition would be providing proof that the goods have been shipped.
• You invoice your customer. Once the customer receives their order, you send an invoice to the customer and a copy of the invoice to the financing company.
• The customer pays the financing company. Your customer pays the financing company directly.
• The financing company deducts its fee and transfers funds to your company. After the finance company receives payment from your customer, it deducts its fee from the payment and sends the remaining balance to you.

Pros and cons of purchase order financing

Purchase order financing has several advantages over other forms of financing, but there are downsides as well. Here’s a look at the pros and cons.

Purchase order financing companies: Where to get funding

Below is a list of PO financing companies to consider. To provide you with the best recommendations, we selected reputable companies that offer flexible and competitive terms suited to businesses of all sizes.

Keep in mind that there are many other PO financing companies out there, but this list is a good starting point for comparing your options.

• SouthStar Capital. SouthStar Capital offers 100% financing on purchase orders and can provide funding in as little as two to five days. The company will even advance the amount of the order invoice to you as soon as the customer receives their order, so you don’t have to wait 30, 60 or more days for the customer to pay the invoice before you get paid.
• Commercial Capital LLC. Commercial Capital LLC works with businesses in the U.S. and Canada on orders of $100,000 or more with a gross profit margin of at least 20%.
• Express Trade Capital. Express Trade Capital finances up to 100% of the cost of presold goods, along with the cost of transportation, customs and duties.
• Star Funding, Inc. Star Funding, Inc. will finance up to 100% of a purchase order, whether you need to purchase goods for resale or buy components from several vendors to produce goods in-house. Rates will vary depending on the size and duration of the transaction but usually range from 2% to 5% per 30-day period.
• Capstone Corporate Funding. Capstone Corporate Funding offers up to 100% financing on purchase orders for trade contractors, suppliers, distributors, manufacturers, retailers and importers/exporters. It also offers invoice factoring services to help businesses maintain cash flow throughout the trade cycle.

How to choose a PO financing company

When choosing a PO financing company, look for companies with a strong reputation, transparent terms and responsive customer support to avoid issues and get funding that aligns with your goals and cash flow requirements.

Here are a few ways to vet any company you consider:

• Visit the company’s website. Review the company’s website for information on their financing terms, application requirements and contact options. While every PO financing company might not publish its rates and terms, an informative website is a good sign.
• Talk to a representative. Call the company to gauge its customer service. Notice if you can easily reach a representative and whether they answer your questions clearly and helpfully.
• Check reviews and ratings. Look up reviews on the Better Business Bureau (BBB), Trustpilot and other business forums. While every company fields customer complaints from time to time, a large number of unresolved customer complaints may be a red flag that the company has issues with customer service.

How to get purchase order financing

The business application process typically begins with filling out an online form or making a phone call. You’ll need to provide the lender with a purchase order from the customer and the pro-forma invoice from the vendor.
Approval might take some time — possibly a few weeks if this is your first time applying for financing with the lender.

Some of the criteria the finance company will consider when evaluating your application and determining the fee includes:

• Does the transaction meet the requirements? Some companies only finance certain types of products or require a minimum transaction amount.
• Is your customer creditworthy? Your customer’s business credit history is a crucial consideration. PO financing companies typically consider applications on a case-by-case basis, so approval depends on your customer’s ability to pay and the order’s value.
• Is your supplier reliable? Lenders prefer to finance orders from established suppliers with no financial problems.
• Is your company qualified? The lender may review your financial statements, supplier and client contracts and information available in public records to determine if the business can execute the order.
• Do the company owners qualify? Lenders prefer to work with business owners with relevant experience and no legal problems.

Talking with your customers about PO financing

Discuss purchase order financing with your customers since the lender may need to communicate with them. PO financing companies assess the creditworthiness of your customers to confirm they can afford to pay for the order once the supplier fulfills it.

Explain to your customers how PO financing benefits them. For example, you can highlight how PO financing allows you to fulfill large orders on time and meet their needs. Be clear that approval might require a business credit check and assessment of whether the customer has a history of bankruptcies or litigation.

The financing company doesn’t need authorization to check the customer’s credit because business credit scores are publicly available. Still, it’s a good idea to prepare for questions and possible hesitation from customers unfamiliar with PO financing. Be transparent about the process and answer their questions to build trust and cooperation.

Alternatives to PO financing

If purchase order financing isn’t right for your business, consider the following alternatives:

• Invoice financing. Invoice financing is a form of asset-based lending that allows businesses to borrow against the accounts receivable they have outstanding. This type of financing can be a great option for companies with healthy revenues that need a short-term business loan to cover a specific expense, such as paying for new inventory.
• Invoice factoring. Invoice factoring is an alternative to purchase order financing that many businesses use to get the cash they need to run their operations. With invoice factoring, a business sells its outstanding invoices to a factoring company in exchange for a lump sum of cash. This can be a great option for businesses that have a lot of outstanding invoices and need the cash quickly.
• Term loans. A business can use a term loan as an alternative to purchase order financing. Term loans give you a lump sum of cash upfront that you can use for various purposes, and they’re often available from local banks and credit unions.

 


 
• SBA loans. SBA loans have several advantages over purchase order financing. The SBA caps interest rates on SBA loans, so rates may be much lower than you’d pay for purchase order financing. Plus, the federal government guarantees SBA loans, and that gives lenders confidence in lending to small businesses.
• Merchant cash advance. A merchant cash advance (MCA) is a form of alternative financing that provides companies with an advance against future credit and debit card sales. One advantage of an MCA is that the approval process is much faster than traditional loans. In most cases, you can get the money you need in just a few days.
• Line of credit. A business line of credit may not require any collateral and the proceeds can be used for any purpose, including purchasing inventory. This makes it a more flexible option for some businesses.