Financing guide
Purchase order (PO) financing: how it works
Won an order bigger than your cash on hand? Purchase order financing lets a funding partner pay your supplier so you can deliver the order — without turning it down or draining your working capital.
Start my free funding requestHow purchase order financing works
The details vary by funding partner, but most PO financing follows the same basic path.
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01
You receive a confirmed order
A creditworthy business or government customer sends you a purchase order for goods you need a supplier to produce or provide.
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02
A funding partner reviews the deal
The partner looks at the order, your customer, your supplier, and your margin. If it approves, it pays your supplier directly, often by direct payment or a letter of credit.
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03
Your supplier fills the order
The goods are produced and delivered to your customer, so you keep the relationship and the sale.
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04
Your customer pays, and you keep the margin
When your customer pays the invoice, the funding partner is repaid along with its fees, and any remainder goes to you. If your customer doesn’t pay, your agreement sets out what you owe. Some businesses pair this step with invoice factoring; see the comparison below.
Is it the right fit?
Often a good fit
- Distributors, wholesalers, resellers, and importers selling physical goods
- Government contractors with a confirmed award or order
- Orders from creditworthy business or government customers
- Deals with enough margin to cover financing costs
- A reliable supplier with a track record of delivering
Usually not the right tool
- Service businesses with no physical goods to deliver
- Sales to individual consumers rather than businesses
- Very thin margins that financing costs would erase
- General cash-flow needs with no specific order behind them (see working capital)
PO financing requirements: what funding partners look at
Each funding partner sets its own requirements, and meeting them doesn’t guarantee approval or funding.
- Your customer. Their creditworthiness and payment history, since their payment repays the financing.
- The order. A signed purchase order with clear quantities, pricing, and delivery terms.
- Your supplier. Their ability to deliver on time and to specification.
- Your margin. Whether the deal still makes sense after fees.
- Your experience. A history of fulfilling similar orders helps.
What it costs
Fees vary by funding partner, deal size, and how long your customer takes to pay. Ask the funding partner to set out all of its fees and terms in writing before you agree to anything. Compare the total cost against your margin on the order, and consider asking your own advisor to review the agreement.
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Purchase order financing vs. invoice factoring
The simplest way to tell the two apart is to ask whether the goods have been delivered yet. If they haven’t, purchase order financing is built for that half of the order cycle: a funding partner pays your supplier so the order can be filled. If they have, and you are waiting to be paid, invoice factoring is built for the other half. Both are agreements between you and an independent funding partner, and both often lean more on your customer’s credit than on your own.
Purchase order financing
- When it applies. Before delivery, while you hold a confirmed order and your supplier needs paying first.
- Where the money goes. Generally to your supplier, often by direct payment or a letter of credit.
- What it is sized to. Generally what you owe your supplier, rather than the full value of the order.
- Your customer’s part. Their payment for the finished order is what repays the funding partner. How that payment is routed varies, so ask the funding partner how it would work on your deal, including what you would owe if your customer doesn’t pay.
- Where it usually isn’t the right tool. Orders for services with no physical goods to deliver, or margins too thin to carry the cost.
Invoice factoring
- When it applies. After delivery, once the work is done, the invoice is out, and you are waiting to be paid.
- Where the money goes. To you: the partner advances a large share of the invoice’s value, and once your customer pays, releases the balance minus its fee.
- What it is sized to. An invoice already earned, for goods or services your customer has received and accepted.
- Your customer’s part. In most factoring arrangements your customers are told to pay the factor directly. Some partners offer arrangements where your customers keep paying you.
- Where it usually isn’t the right tool. Sales to individual consumers, disputed invoices, or invoices already pledged to another financing company.
Which one is right for your business?
- The goods aren’t made or shipped yet. Purchase order financing is built for this stage: a funding partner pays your supplier so the order can be filled.
- The order is delivered and the invoice is out. Invoice factoring is built for this stage: a factoring partner can advance cash against the unpaid invoice.
- You sell services rather than goods. PO financing usually isn’t the right tool, but factoring is common in work like trucking and staffing.
- Your buyers are individual consumers. Neither one is generally a fit. Both are built around business and government customers.
Can you use both on the same order?
They are not always alternatives. On one order the two can run in sequence: PO financing pays your supplier so the goods can be delivered. A factoring advance against the resulting invoice then typically settles that earlier advance, and any remainder goes to you.
When the same funding partner handles both stages, the handoff is usually simpler, because one company holds the claim on your customer’s payment. When two partners are involved, they generally need to agree between themselves which of them is repaid first, and some will want that settled before they fund.
What to ask before you use both
- Whether both stages sit with the same funding partner
- How the second advance settles the first
- What happens if your customer disputes the invoice or pays late
- What a search of your receivables turns up, and whether an existing claim would need to be cleared first
- What each stage costs, and what the two together cost on this order
Purchase order financing FAQ
Is purchase order financing a loan?
Structures vary by funding partner. Many are set up as a transaction-based advance repaid from your customer’s payment rather than a conventional term loan, but some are treated as loans, and you may still owe the partner if your customer doesn’t pay. Ask how the agreement handles that before you sign.
Do I need good credit to get PO financing?
Because repayment usually comes from your customer’s payment, funding partners often focus more on your customer and the transaction than on your own credit history. Each partner sets its own requirements, and some will review your credit as part of their process.
How is PO financing different from invoice factoring?
PO financing funds the order before it is delivered, by paying your supplier. Invoice factoring funds you after delivery, against the invoice you send your customer. The two are often used together: PO financing to fill the order, then factoring to bridge the wait for payment.
How much of an order can be financed?
It depends on the funding partner and the deal, including your supplier costs and your margin. PO financing is generally designed to cover what you owe your supplier rather than the full value of the order.
Can I use purchase order financing and invoice factoring on the same order?
Often, yes, in sequence: PO financing pays your supplier, and a factoring advance against the resulting invoice typically settles that earlier advance. Whether both stages sit with one funding partner or two depends on the partners involved.
Which costs more, PO financing or invoice factoring?
Neither is cheaper in every case. Cost depends on the funding partner, your customer, the deal, and how long payment takes. Ask each partner to set out the total cost on your actual order, and weigh it against your margin.
Can I use PO financing on a government contract?
Often, yes, if you hold a confirmed award or order. On a federal contract, funding partners generally need the right to be paid formally assigned to them under the Assignment of Claims Act, which includes written notice to the contracting officer and the paying office. The contract must not prohibit assignment, and an assignment can generally go to only one financing company. State and local contracts have their own rules, so ask the funding partner how it would handle yours.
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Start my free funding requestPurchase Order Lending is a free referral service, not a lender. Funding partners may pay us a referral fee when a referral results in funding. Each partner sets its own rates, terms, and approval. This guide is general information, not financial advice.