Purchase Order Financing Companies

Warning Signs

• Upfront fees before any review. Legitimate due diligence fees are disclosed in writing and tied to a real underwriting process.

• Guaranteed approval. No serious lender approves a deal before checking the customer and the supplier.

• Vague pricing. If a provider will not put the full fee schedule in writing, walk away.

• Pressure to sign quickly. Time pressure is often used to keep you from comparing offers.

• Unclear contact with your customer. A provider that will not explain how it verifies orders could harm an important relationship.

Documents to Have Ready

Having a clean package ready speeds approval and signals that you run a well-organized business.

• The customer purchase order or contract

• Supplier quote or pro forma invoice with pricing and delivery terms

• A deal summary showing sale price, cost and gross margin

• Recent business financial statements and tax returns

• Accounts receivable and accounts payable aging reports

• Formation documents and ownership details

• Examples of similar orders you have filled

What Happens After You Apply

Expect the lender to call your customer to confirm the order and its terms, and to contact the supplier to verify pricing, capacity and payment instructions. It will run a lien search, review your financials and ask how the goods move from the supplier to the customer. Once approved, you sign the financing agreement and the lender pays the supplier.

Later deals with the same customer and supplier typically move much faster because most of the checking is already done. That is one reason many businesses stay with a single provider once they find one that works.

Frequently Asked Questions

Should I use a broker or go direct?
Going direct gives you more control over the relationship. A broker can help if your deal is unusual and you do not know which funders handle it, but ask how the broker is paid.

How many purchase order financing companies should I compare?
Two or three written offers on the same deal are usually enough to see whether pricing and terms are reasonable.

Will using one hurt my relationship with my customer?
Large buyers are often familiar with supplier financing. A lender that communicates professionally and follows your lead on timing should not cause problems.

Compare Your Options With Confidence

The best fit is a provider that already funds deals like yours and is open about every fee. Prepare your documents, ask the same questions of each candidate and compare total cost on a real order, not on the advertised rate.

Purchase order financing companies pay your supplier when you have a confirmed order from a creditworthy customer but not the cash to buy the goods. The providers in this market vary a great deal in deal size, industry focus, pricing and how they treat your customer, so the lender you pick shapes both the cost and the experience.

This buyer's guide explains the kinds of providers you will come across, how to judge fit, which questions to ask, what to look for in a term sheet and which warning signs should end a conversation.

Types of Providers You Will Meet

• Specialty purchase order lenders focus on funding supplier payments for distributors, importers and resellers. They are usually the most flexible on credit and the most experienced with complex supply chains.

• Factoring firms with purchase order programs fund the supplier and then factor the invoice once goods are delivered. One provider handles the whole cycle.

• Asset-based lenders may fund purchase orders as part of a broader line secured by receivables and inventory, usually for larger and more established companies.

• Banks with trade finance services issue letters of credit to overseas suppliers. They typically require an existing banking relationship and stronger financials.

• Brokers do not lend but shop your deal to several funders. A good broker saves time, while a poor one adds cost without adding value.

How to Judge Whether a Provider Fits

Start by screening on the basics. A provider that does not fund your type of deal will waste weeks of your time.

• Deal size. Many purchase order financing companies set a minimum order value, and some also cap single deals. Make sure your typical order falls in range.

• Industry and product. Some avoid perishable goods, custom products or anything that needs significant work after delivery.

• Domestic or import. Funding an overseas factory requires letter of credit experience and comfort with shipping and customs timelines.

• Customer types. Confirm the provider funds sales to your customers, whether they are big-box retailers, government agencies or other businesses.

• Funding percentage. Ask how much of the supplier cost they cover and how much you must contribute.

• Speed. First deals take longer because of due diligence. Ask how long a repeat order takes once you are set up.

Questions to Ask Before You Sign

1. How is the fee calculated, and in what time increments after the first period?

2. What other charges apply, such as due diligence, wire, letter of credit or monitoring fees?

3. How will you contact my customer, and what will you say?

4. Who pays the supplier, and by what method?

5. What happens if the supplier ships late or the customer rejects part of the order?

6. Do you also factor the invoice, or will I need a second lender?

7. Is there a minimum volume, a monthly minimum fee or an exclusivity requirement?

8. Do you require a personal guarantee, and what does it cover?

9. Can I see a sample settlement statement for a deal like mine?

Reading the Term Sheet

A low headline rate can hide a higher total cost. Focus on these terms:

• Fee basis. A fee charged on the full order value costs more than the same rate on the amount actually advanced.

• Period length. A rate per 30 days with no proration after the first period can make a 31-day deal cost the same as a 60-day deal.

• Recourse. If your customer does not pay, you will likely owe the lender. Know exactly when and how much.

• Collateral. Check whether the lender takes a security interest only in the specific deal or a blanket lien on all business assets.

• Term and exit. Look for termination fees, automatic renewals and notice periods if the agreement covers more than one deal.