Purchase Order Financing

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Purchase Order (PO) Financing

Purchase Order Funding Options

If you are a new business, you may find yourself being unable to cover the cost of large or numerous orders. You don’t want to have to turn these orders down as you will lose revenue and you may damage your reputation, and find it difficult to grow. That is where purchase order financing, or PO financing, comes in.

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What is purchase order financing?

Purchase order financing is a form of funding that allows businesses that receive purchase orders to pay their suppliers when they would otherwise be unable to. This means that they can continue to take orders from customers even when they are low on cash.

How does purchase order financing work?

To get the best understanding of how purchase order financing works, it is easiest to break it down into 8 steps:

Step 1: Your customer makes an order with you and you receive the purchase order.

Step 2: You contact your supplier for a quote regarding this order. From this, you will know whether or not you can cover the costs. Luckily, PO financing can help.

Step 3: After comparing lenders, you apply for purchase order financing. The lender you decide to partner with will then offer you up to 100% of the order cost, although it is typically around 80% or 90% of the order (you will have to pay the rest yourself). The amount you are approved for depends on lender requirements, the creditworthiness of your customer, and the reputation of your supplier.

Step 4: The PO financing company pays out to your supplier to begin the fulfillment of the order made by your customer.

Step 5: Your supplier delivers the completed order directly to the customer.

Step 6: You send out an invoice to your customer.

Step 7: The customer pays the outstanding balance directly to the PO financing company.

Step 8: Once the PO financing company has received payment, they will send it on to you with their fees deducted. Those fees are effectively like interest on a traditional loan.

Who uses purchase order financing?

Purchase order financing can be used by any business that uses a supplier to fill their customer’s orders. This includes:

  • wholesalers
  • distributers
  • businesses that are affected by seasonality
  • startups
  • government contractors

Be aware that you will be unable to use PO financing if you are selling a service or materials. To take advantage of PO financing you must be selling a finished, physical product.

Common reasons for PO financing

There are many reasons why you may need to use purchase order financing, such as:

  • buying additional inventory
  • purchasing new equipment
  • purchasing products for upcoming orders
  • To cover payroll
  • To pay a large bill that’s come at an unfortunate time

Fortunately, you can use PO financing at any time you have a purchase order and you need additional funds for your business.

Purchase order financing pros & cons

As with any type of financing, purchase order financing has both pros and cons:


  • generally easy to qualify for as the purchase order itself acts as collateral
  • you don’t have to provide a personal guarantee – typically, the lender takes on the risk if your customer is unable to pay for any reason
  • a great option for startups
  • allows you to fulfill orders you otherwise would have had to turn down
  • fast financing, especially after you have developed a relationship with your lender and your customers
  • you don’t have to worry about collecting payments yourself so you can focus on other things
  • there are no monthly installments to pay
  • are likely to qualify even with bad credit


  • fees can be high (we will look at this below)
  • you may not get 100% financing which means you will have to find the remaining funds to cover the order
  • cannot use if you are a service business
  • only a short-term solution
  • your customers will assume you are in financial trouble as they are paying directly to the PO financing company
  • unlikely to get approval for smaller orders
  • financing cannot be used for anything other than fulfilling orders

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How much does purchase order financing cost?

Since purchase order financing isn’t a loan as such, it does not add interest. Instead, the purchase order lender will take off a fee from the money received.

This fee is typically a percentage of the total amount and will vary from lender to lender. With that said, fees generally range from 2% to 6% per month the balance is outstanding.

If you look at these fees in terms of APR, PO financing costs between 20% and 70% APR, which is much higher than other financing options.

It is also important to note that some lenders will add to their percentage rate each month until the purchase order is paid. This is why it is so important to have creditworthy customers. The longer it takes them to pay the invoice, the higher the fees will be and therefore the smaller your cut will be.

Purchase order financing rates

Below is a sample table of what you may expect to pay for purchase order financing from a rate perspective:

Factor Impact on Rate Example
Your credit score Lower score = higher rate 650 score might get 3% monthly rate, 720 score might get 2%
Customer credit score Stronger customer = lower rate High credit could reduce your rate by 0.5%
Transaction size Smaller = higher rate $100k order might get 3%, $500k order might get 2%
Duration Shorter = higher rate 30-day terms might get 3%, 90-day terms might get 2.5%
Complexity More complex = higher rate Many moving parts could add 0.5% to your rate
Supplier reputation Strong reputation = lower rate Established supplier could reduce your rate by 0.25%

Are there alternatives to purchase order financing?

If purchase order financing doesn’t sound like the right option for your business, there are several alternatives, the most popular are:

  • Invoice Factoring: Invoice factoring is where you sell your outstanding invoices at a discount to receive immediate funds. This is a good way to overcome a gap in cash flow but it is only a temporary solution that is likely to be very expensive. Like PO financing, payments are collected directly from customers by the invoice factoring company so that customers will assume your business is struggling.
  • Merchant Cash Advances: This type of financing is best used only as a last resort as it is extremely expensive and risky. Merchant cash advances are given to businesses that receive a high number of credit card transactions every month. The lender will receive a fixed percentage of all future credit card receipts and you will be given a cash advance. This continues until your debt with them is settled. Unless your business grows fairly rapidly, you could find that it is a considerable amount of time before your debt to the MCA company is paid off, and potentially never.
  • Invoice Financing: Invoice financing is where businesses can borrow funds against any outstanding invoices. Borrowers can choose the invoices from which they want advanced payment whenever they need it, up to an agreed credit limit. Businesses can receive up to 100% of an invoice in just one business day which must then be repaid within a certain time frame, with an added fee. Unlike PO financing and invoice factoring, your customers continue to pay you directly so that they remain unaware of any financial trouble.
  • Line of Credit: This is good for small businesses that need funding to pay for smaller expenses. With a line of credit, you are only required to pay interest on what you use, but there may also be some added fees. If you reach your credit limit and are unable to pay it back, you may have to take on another loan to pay it off.
  • Merchant Cash Advance: If you take card payments, you may be able to get a merchant cash advance. This is essentially where you borrow money from your credit card processor and they take a percentage of your payments to pay it back.
  • Business Term Loans: This is a more traditional loan, where you receive a lump sum from a lender that can be used for whatever business expenses you like and you are required to make repayments in monthly or weekly installments, with added interest. You may find this type of financing more difficult to qualify for if you are a startup or small business as they typically require a strong business history.

Is purchase order financing right for your business?

Purchase order financing will be the right choice for your business if you are finding it hard to qualify for a traditional loan or if you have a low credit score. This is because PO financing tends to have more reachable requirements and the lenders are more interested in the creditworthiness of your customers than your credit score.

How to get PO financing

Typical requirements to qualify for PO financing include:

  • you must sell finished, physical products
  • you must sell to B2B or B2G customers
  • the purchase order must total at least $20,000
  • your profit margins must be at least 15%
  • your customers must be creditworthy
  • your suppliers must have a good reputation for manufacturing and delivering on time

To apply for purchase order financing, it is important to do your research and look carefully at what each PO financing company can offer. Start comparing options here and when you find a purchase order financing company that looks right for you, start the application process. Make sure you understand what they require of you so you can have the right documents to hand. With the right preparation, you’ll soon have the funds you need.

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