Purchase order financing, also known as PO financing, is a funding solution for businesses that lack the working capital to fulfill purchase orders. In turn, PO financing companies give business owners the capital they need to pay suppliers and vendors.

Essentially, PO funding capitalizes on the active purchase orders that a business uses as collateral to secure funding for a loan to fill their purchase orders. 

By using this source to boost working capital, purchase order funding for small business can borrow up to 100% of the money or cost needed to fulfill an order the customer places. This offers business owners flexibility when it becomes a challenge to fill active orders, which keeps your cash flow stable.

While other types of purchase order funding for small business lending options typically involve interaction between a lender and borrower, PO funding often involves more participants. To be precise, four parties are usually involved in every transaction.

First, there is the seller that received the purchase order, followed by the one seeking financial assistance to help fulfill the order. The second party is the customer that placed the order with the first party. The third party is the supplier that the first party purchases goods or services from which enables them to fulfill their customers’ orders. The fourth party is the lender that is providing the working capital used to pay suppliers.

Small businesses of all sizes use purchase orders to balance and maintain their operating cash flow. Without it, they would be unable to support new and existing orders. Filling purchase orders is critical for a business to stay functioning, and PO funding is one way to accomplish this. By taking advantage of this source as well as other lines of credit, a small business can easily fulfill orders.

The process itself consists of seven key steps. A purchase order is received from a customer which contains a breakdown of costs from the supplier. PO is submitted to the lender and the lender pays the supplier. The supplier in turn provides the goods to the customer who then pays the lender, and the lender pays the final balance to the borrower.

Here’s a breakdown of the steps involved in Purchase Order (PO) Financing:

PO Financing Companies that process purchase orders from customers are primarily small businesses that can take advantage of PO financing. As a primary requirement, the business should be selling finished, assembled, and completed products. This means that a company that sells raw materials, instead of completed ones, won’t qualify for the financing. Purchase Order Financing Companies are financing businesses that don’t have the funds to complete customer orders. Also, Purchase Order Finance Companies offer the chance to invest in a business with little or no money upfront.

A purchase order (PO) is a contract that buyers send which indicates the quantities, prices, and types of products or services they are looking to purchase to the PO Financing. These buyers usually order in bulk. However, without the right amount of cash, the suppliers cannot fulfill this order. For that reason, they usually apply for purchase order financing.

This type of funding resource is most commonly used by companies that are rapidly growing and, or not able to fulfill the quantity or size of orders they have committed to. Companies that can take advantage of this financing plan include:

Unlike other types of lending services, PO funding is a specific type of lending vehicle that only considers purchase orders or accounts receivable as assets to be used as collateral to secure funding. Most asset-based lending sources also consider inventory, equipment, or real estate as collateral, but this financing option is restricted to the following types of assets:

Purchase order funding rates and fees are based on various factors that the lender considers. Because of the nature of the financial risk associated with this type of financing, the rates and fees are often more expensive than with other traditional bank financing sources. Purchase order funding is thus a viable and popular alternative for companies that require a rapid and efficient method of financing their purchase orders.

Often, rates and fees range from 1.5% to 3.5% per 30-day period. It is important to highlight that the rates and fees are applied also to the cost of filling the order, not only the purchase order value.

For example, if a borrower receives a 100% gross margin for a purchase order, and the purchase order has a total value of $100,000, the cost of filling the order would be $50,000. The purchase order financing rates and fees paid by the borrowing business after the customer is invoiced will be applied to the $50,000 cost of filling the order instead of the $100,000 that is invoiced to the customer.

Different lenders take into account several different factors when evaluating applications. The lender will analyze the credit risk of the purchase order loans by assessing the borrowing business’s features and their client base when determining the rates, fees, and qualification status.