In short
- Purchase order (PO) financing helps a business pay suppliers and costs to fill a large confirmed customer order before the customer pays.
- BDC describes it as a short-term loan. Invoice factoring, by contrast, is the sale of invoices you have already issued.
- It suits resellers, distributors and growing product businesses with a firm order from a creditworthy customer, but it is not for every order.
- Compare the total cost, the repayment plan and the risk of a delivery problem before you commit. Alternatives include a line of credit and export working capital programs.
A business wins an order bigger than it has ever filled. That is good news until the supplier wants payment up front, the staff need paying, and the customer will not pay for 30 to 60 days after delivery. Purchase order financing is one way to cover that gap. This guide explains what it is, how it differs from similar products, and when it may or may not make sense.
This is general information, not legal or financial advice. Terms vary a great deal between providers, so read every contract carefully.
What purchase order financing is
BDC's article on purchase order financing describes it as a short-term loan that gives your business the liquidity it needs to fill orders. The financing is tied to a specific confirmed order from a customer: you use it to pay the supplier and other costs of producing and delivering that order, then repay it when the order is invoiced or paid.
BDC's version covers up to 90% of the purchase order's value, works alongside an existing line of credit with another institution, and is timed to either invoicing the order or receiving payment. Interest is paid during the loan term, with a one-time balloon payment at maturity. Other providers in the market may structure PO financing differently, for example by paying suppliers directly, so do not assume that every offer works like BDC's.
A typical flow
- You receive a purchase order from a customer, such as a retailer or a government buyer, for goods you must source or produce.
- You apply for financing and provide the order, your supplier's quote, your margin and information about the customer. Providers look closely at whether the customer is reliable and the order is firm.
- Funds are advanced. Depending on the product, the money may come to you or may go straight to the supplier.
- The supplier fills the order and you deliver it to the customer.
- You invoice the customer and collect payment.
- You repay the financing from the customer's payment, along with interest or fees.
With BDC's approach, you manage the transaction yourself. You pay suppliers and collect receivables directly, so suppliers and customers deal only with your company.
An illustrative example
All numbers here are invented for illustration. A distributor receives a $100,000 order and needs to pay its supplier $70,000 before delivery. If a PO loan covers up to 90% of the order's value, the ceiling is $100,000 x 0.90 = $90,000, which covers the $70,000 supplier cost with room for freight and labour. After delivery the customer pays in 45 days. The distributor repays the loan plus interest from that payment and keeps what is left.
How it differs from invoice factoring
People often mix these two up. They are different tools at different points in the sales cycle.
| Purchase order financing | Invoice factoring | |
|---|---|---|
| Based on | A confirmed customer order, before delivery | An invoice you have already issued |
| Nature (per BDC) | A short-term loan | A sale of receivables at a discount |
| Pays for | Supplier and production costs for the order | Cash now instead of waiting for the customer to pay |
| Customer contact | With BDC's version, customers deal only with you | Customers usually pay the financing provider |
BDC's glossary entry on factoring describes it as selling invoices to a financial institution or specialized firm at a discount to generate short-term cash. BDC also says PO financing is a less expensive form of financing than factoring, and notes that with factoring the institution pays your suppliers and collects from your customers, which can signal that the business needs a backer. Our guide on how invoice factoring works covers factoring in detail.
The two can be used one after the other. PO financing funds the order, and once you deliver and invoice, invoice factoring can turn that invoice into cash if you do not want to wait for the customer. For illustration only, factoring fees are often described as roughly 1% to 5% per month outstanding, with 80% to 95% of the invoice advanced. On a $100,000 invoice with an 85% advance you would receive $85,000 up front. At an illustrative 3% per month for two months, the fee would be $100,000 x 0.03 x 2 = $6,000. Real pricing depends on the provider and the contract.
How it differs from inventory financing
Inventory financing is a loan secured by goods you already hold or are buying for general stock. PO financing is tied to a specific customer order. The BDC article we reviewed does not compare the two, so this distinction comes from general industry usage. Generally, if you are stocking up for expected sales, you are looking at inventory financing, a line of credit or working capital. If you already have a signed order and need to buy goods to fill it, PO financing fits more precisely.
Who it suits
BDC describes it as suiting entrepreneurs whose growth depends on accepting larger contracts, businesses that cannot cover supplier and staff costs for a big order from cash flow alone, companies entering unfamiliar or foreign markets, and owners who prefer to plan financing ahead. In practice that includes:
- Resellers and distributors, such as those in wholesale distribution
- Product makers moving from small batches to large orders, including manufacturers
- E-commerce and wholesale sellers receiving a first large retail order
- Businesses supplying contractors or public bodies on fixed-price orders
It fits poorly when the order is not firm, the customer is not creditworthy, your margin on the order is thin or the product is custom and hard to resell.
What it costs
The BDC article gives no rates or fees, and costs differ among providers, so we will not quote any for PO financing. Qualitatively, the cost depends on the size and length of the advance, the strength of the customer and supplier, the risk that something goes wrong, and whether the structure includes fees, interest or both. Compare the total cost in dollars of the entire transaction against your gross profit on the order. If financing eats most of your margin, the order may not be worth taking. Our guide on how to read a business loan offer and our explainer on factor rate vs APR help with comparing different pricing formats.
Risks to weigh
- Repayment timing. A balloon payment at the end means you need a clear plan for where the money comes from. A late customer can leave you short.
- Supplier or delivery problems. If goods arrive late, defective or not at all, the order may be cancelled or disputed while the financing is still due.
- Customer risk. The whole idea depends on being paid by the customer. Check their credit and payment history.
- Thin margins. After paying for goods, freight, financing costs and your own overhead, the order must still earn a profit.
- Contract terms. Look for fees triggered by delays, minimums, personal guarantees, security over other assets, and what happens if the order is cancelled.
- Visibility to customers and suppliers. Some structures involve the provider in payments, which can reveal that you needed outside financing. BDC notes this as a difference from factoring.
Alternatives to consider
- A line of credit for general flexibility. See line of credit vs term loan.
- Working capital financing for payroll, inventory and gaps, as long as repayment fits your cash flow.
- Supplier terms. Ask whether the supplier will give you 30 days or take a deposit instead of full payment.
- Customer deposits. A deposit or milestone payment from the customer can cut or remove the need for financing.
- Invoice factoring after delivery, as described above.
- Export programs. For export orders, the EXIM Working Capital Loan Guarantee in the US helps exporters fund inputs needed to fulfil export orders: EXIM states it provides a 90% guarantee to the lender and sets a minimum US content requirement of 10%. The page speaks of sales orders and export sales rather than purchase orders by name. In Canada, Export Development Canada lists its solutions on its site, and BDC says that for international orders EDC evaluates foreign buyers and provides credit insurance when needed.
Questions to ask any provider
- Is this a loan, a purchase of receivables or something else, and who is the contract with?
- Do you pay the supplier directly or do I?
- What is the total cost in dollars if the customer pays in 30, 60 or 90 days?
- What happens if the order is changed, delayed or cancelled?
- Will my customer or supplier be contacted?
- What security or personal guarantee do you require?
Where celerfunding.com fits
celerfunding.com is a referral service, not a lender. You can send us a request and we will tell you honestly whether we can introduce a suitable provider for this type of financing. We do not claim to have purchase order financing providers in our network; if none fits, we will say so and you may be better served by the alternatives above. Lenders may pay us a fee if a business is funded; business owners pay us nothing. There are no guarantees on approval, price or speed. See our comparison of options, read about how fast you can get funding or send a request.