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Fulfilling purchase orders are the only way to keep the cash flow positive—but what happens when you don’t have the funds? A new project, late payments, and seasonal clients all translate into a need for capital sooner rather than later. For many B2B organizations, purchase order financing provides the funds they need to keep operations running smoothly.
What Is Purchase Order Financing?
Purchase order financing, often abbreviated as PO financing, is a form of alternative short-term funding used to pay a supplier to fill a customer’s order.
Who Uses Purchase Order Financing?
PO financing is a method of obtaining working capital for businesses that sell physical goods and need to invest in inventory. Usually, this form of financing is only available for B2B companies. Businesses that typically turn to a PO lender are distributors, wholesalers, resellers, outsourcers, government contractors, startups, importers, and businesses with seasonal cash flow.
When to Use Purchase Order Financing
No matter what kind of business you’re in, there are a few reasons why organizations turn to purchase order financing rather than traditional financing. Since a PO financing lender typically offers faster approvals and almost immediate access to working capital, this type of financing is ideal for situations when cash flow is tight.
But this form of funding can also be helpful when working with a large purchase order from a new client, if your organization is growing faster than payments are being processed, or if your business is highly seasonal.
How to Qualify for Purchase Order Financing
A purchase order loan requires fewer qualifications than traditional financing or small business loans. In fact, the PO financing company cares more about the creditworthiness of your customer than your own credit history, most of the time. You’ll likely need the following to qualify for PO funding:
- A verified purchase order
- Business or government customers
- A creditworthy supplier and customer
- Invoice to the customer
- Your gross margin
- Your most recent P&L sheet or balance sheet
Advantages of Purchase Order Financing
Low Barrier to Entry
Purchase order funding requires significantly fewer documents to prove eligibility, and approvals are usually faster than with traditional loans.
Great for Startups
Traditional financing options often only offer a business line of credit to low-risk businesses, meaning startups may find it challenging to tap into working capital. A purchase order finance company only needs to know that you have gross margins, a product that people are buying, and that your supplier and customers are creditworthy. This makes it easier for startups to get credit through PO financing than many other forms of funding.
Flexible Funding
Since PO financing options are usually short-term sources of cash, there are no long-term commitments. Furthermore, repayment methods tend to be more flexible than with government loans or other forms of financing.
Disadvantages of Purchase Order Financing
Fees Are Often Higher
100% financing isn’t common, and even if your PO is completely financed by the company, the high fees can take a chunk out of your income.
Not Available for B2C Organizations
It’s not possible to get purchase order financing for B2C companies. You will need to work directly with other businesses or government agencies.
Customers Work With the Lender
With PO financing, the lender contacts your customers directly. This means that if their customer service isn’t up to par with you and your customers expectations, your company can get a bad reputation by association.
How Does Purchase Order Financing Work?
Working with a PO financing company is usually straightforward.
1. You Receive a Purchase Order
First, you’ll receive a purchase order from a customer. Perhaps it’s a new client, and the request is a significantly larger order, or you’re simply short on working capital. You’ll likely need to find some extra cash to fulfill the order, but first, you send the PO to the suppliers to see if you can get a discount.
2. Your Supplier Estimates Your Costs
At this point, you’ll know exactly how much the PO will cost, and how much financing you’ll need. The supplier should forward you an official invoice with the breakdown of costs.
3. You Apply for Purchase Order Financing
At this point, it’s possible to apply with a PO financing lender to kick off the order. Generally, it only takes a few days to get approved for financing, and you can expect to get 80-90% of the PO funds.
4. The PO Financing Company Pays Your Supplier
The PO finance company forwards the credit to your supplier directly, and you will pay the remainder.
5. Your Supplier Fulfills the PO
With the purchase order paid, your supplier can focus on delivering the goods directly to the customer. At this point, the supplier should notify you of the delivery, and it’s time for you to invoice the customer.
6. Your Customer Pays the Purchase Order
Finally, the purchase order financing company will send you the customer’s payment, minus their fees.
Alternatives to Purchase Order Financing
There are several alternatives to purchase order financing. Some examples are:
- Invoice factoring
- Invoice financing
- A business line of credit
- Merchant Cash advance
Typically, a business line of credit can take time to establish and will be difficult for startups and new businesses to obtain. Merchant cash advances are generally considered a last resort, as the interest associated with these loans is often higher than in any other loan.
However, invoice factoring and financing are the closest natural alternatives to working with a PO lender.
Purchase Order Financing vs. Invoice Financing
The difference between a PO lender and an invoice financing or factoring company is simple.
Invoice financing involves using a customer invoice rather than a purchase order to get an advance on working capital. As a type of accounts receivable financing, invoice financing is less restricted than working with a PO lender. You don’t necessarily have to use the cash to pay your supplier. Instead, you can use it to fulfill payroll, expand to a new location, upgrade equipment, or any other business cost. And you can request funding in minutes any time you need a quick capital boost.
You can also choose invoice factoring, in which you effectively sell your invoice to the financing company. They will follow up on payments if needed in a professional manner. With FundThrough, you get the funds in days.
Invoice financing companies generally only provide up to 90% of the invoice in advance. With FundThrough, you can get 100% of the invoice advanced.
Purchase Order Financing vs. Short-Term Loans
Traditional short-term loans generally have lower interest rates than purchase order financing. However, there’s no guarantee of approval, and your business will be scrutinized far more than your customers or supplier. These financing options typically require a higher credit rating and significant paperwork. To make matters worse, short-term loans can take weeks to pull through, thus pushing back the delivery date.
Getting a short-term loan from an alternative lender may be just as fast as PO financing, but the repayments are structured differently. You will need to pay the money back over the course of several months, often making daily or weekly payments. However, the working capital can be used for anything business-related.
Finding a Purchase Order Financing Company
To find the right purchase order financing company for your organization, it can be helpful to know more than what their interest rate or fees are. You’ll also want to consider if they’ve worked in your industry, how they advance funds, how and when you will receive payment, and how they communicate with your customers and your supplier. After all, this PO finance company will be seen as an extension of your business, and they must present themselves well to your customers and suppliers.
The Bottom Line
Only you will know if a PO loan is right for you at the end of the day. If you feel like you want a more flexible option, you may want to check our invoice factoring solution. You can see how it works today—see if you qualify for FundThrough now.