Purchase Order Financing

How Fees Are Structured

Most lenders price purchase order financing as a percentage of the amount advanced for each period it remains outstanding, often 30 days, sometimes with shorter increments after the first period. Some quote a monthly rate instead. On top of that you may see a due diligence or setup fee, letter of credit charges from the issuing bank, wire fees and, if the invoice is factored, a separate factoring fee.

Because the cost is tied to time, the biggest lever you control is speed. Short supplier lead times, prompt delivery and customers who pay on schedule all lower the total. Ask any lender to model the full cost of your specific deal, including what happens if the customer pays 30 days late.

Pairing It With Invoice Factoring

Purchase order financing covers the period before delivery. Once the goods are delivered and invoiced, many lenders roll the deal into invoice factoring or a receivables line. The factor advances most of the invoice value, and that advance pays off the purchase order lender.

This handoff can lower your cost, since factoring fees are often lower than PO fees, and it frees the purchase order lender to fund your next order. Some providers offer both in one agreement, which avoids coordinating two lenders and two sets of paperwork.

Limits and Drawbacks

• Cost. It is usually more expensive than a bank line of credit, which makes it best for orders a bank will not fund quickly.

• Customer contact. Your customer will typically be asked to verify the order and pay a lender-controlled account.

• Narrow use. Funds go to the supplier for the specific goods. They do not cover rent, payroll or general overhead.

• Deal minimums. Many lenders will not consider small orders, so it may not help with routine purchasing.

• Delivery risk. If the supplier ships late or the goods are rejected, fees keep running and you may owe the lender.

Frequently Asked Questions

Is purchase order financing a loan?
It works like short-term credit, but it is often structured as a payment of supplier costs secured by the order and the resulting invoice. Repayment comes from your customer's payment rather than your own monthly installments.

How much of the supplier cost will a lender cover?
It depends on the margin and the risk. Some lenders cover most or all of the supplier cost on strong deals, while others require you to put in part of the money.

Can I use it for raw materials I turn into products?
Generally not. It is designed for finished goods. Manufacturers usually need inventory financing, a working capital line or an SBA-backed facility instead.

Find Funding for Your Next Order

If a large order is sitting on your desk and your supplier wants payment before it ships, financing against that order may let you say yes. Gather the purchase order, the supplier quote and your margin calculation, then compare offers on total cost for the full time the money will be outstanding.

Purchase order financing pays your supplier so you can fill a customer order you could not otherwise afford to fill. The lender advances money against a confirmed purchase order from a creditworthy customer, the goods ship, and the lender is repaid when the customer pays the invoice.

It is built for businesses that sell physical products they do not make themselves, such as distributors, wholesalers, importers and resellers. This page walks through the process step by step, runs the numbers on a sample deal and covers who qualifies, how fees work and where the limits are.

How the Process Works, Step by Step

1. You receive a purchase order from a business or government customer with good credit.

2. You get a supplier quote for the goods needed to fill it, showing price, quantity and delivery terms.

3. The lender reviews the deal. It verifies the order with your customer, checks the supplier and confirms your margin.

4. The lender pays the supplier directly, often by wire or a letter of credit. Funds rarely pass through your account.

5. The supplier ships to your customer, or to you for final packaging and delivery.

6. You invoice the customer. The invoice is usually assigned to the lender or financed through a factoring arrangement.

7. The customer pays into an account the lender controls. The lender deducts its advance and fees and sends you the balance.

A Worked Example

The numbers below are hypothetical and rounded to keep the math clear.

A distributor receives a $200,000 order from a regional retail chain. Its supplier will deliver the goods for $120,000, which leaves $80,000 of gross profit. The distributor does not have $120,000 in cash, so it applies for PO financing.

The lender pays the supplier $120,000. The goods reach the retailer on day 30, and the retailer pays on 45-day terms, so the money comes back on day 75. Suppose the lender charges 3 percent of the amount advanced for each 30-day period or part of one. Day 75 falls in the third period, so the fee is 9 percent of $120,000, or $10,800.

The distributor keeps $80,000 minus $10,800, or $69,200, on an order it would have had to decline. Some lenders prorate fees after the first period, which would lower the cost. Others add due diligence or wire fees, which would raise it.

Businesses That Fit Best

• Distributors and wholesalers with orders larger than their cash on hand.

• Importers who must pay overseas factories before goods are shipped.

• Seasonal sellers that receive large holiday or back-to-school orders months in advance.

• Government suppliers filling product orders for agencies with reliable payment.

• Fast-growing companies whose orders have outrun their bank line.

It is usually a poor fit for service businesses, for companies that manufacture in-house and need to fund raw materials and labor, and for sales to consumers. Lenders want a single, identifiable business customer whose credit they can check.

What Lenders Look For

The customer's credit matters more than yours. A lender may approve a young company with thin financials if the order comes from a large, established buyer. Beyond that, expect questions about:

• Gross margin. Many lenders want a healthy margin on the deal so fees do not wipe out the profit. Thin-margin orders are hard to place.

• Supplier track record. The lender needs confidence that the supplier can deliver the right goods on time.

• Order terms. Firm, non-cancellable orders with clear delivery and acceptance terms are easier to finance.

• Your experience. Proof that you have filled similar orders before reduces the risk of a failed delivery.

• Existing liens. A blanket lien from another lender on your receivables may need to be subordinated.