Have you ever landed a big order but lacked the funds to fulfill it? That's where purchase order financing comes in. In short, purchase order financing (also known as PO financing) is a short-term funding method that helps businesses pay suppliers to fulfill customer orders when they don’t have enough cash on hand.
This financing is especially useful for companies that sell physical goods and receive large purchase orders that exceed their working capital. Instead of turning down the order or risking bankruptcy, the business taps into PO financing to cover supplier costs until the customer pays.
Because PO financing is tied to a specific order rather than general business needs, lenders focus heavily on the creditworthiness of your customer and the reliability of your suppliers.
Understanding what is purchase order financing helps clarify why you'd use it. The user intent behind that query is informational / commercial investigation — people want to know the mechanism, benefits, risks, and suitability. This article aims to fully satisfy that intent by covering:
How it works (step-by-step)
Who qualifies
Costs, risks, and alternatives
Real-world examples
Next steps for applying
If you want to skip ahead, feel free to jump to “How to Apply for PO Financing” or “Pros & Cons” below.
Here’s a simplified view. Each financing deal may differ slightly, but the general workflow follows:
Your customer (usually a business or government agency) sends you a formal purchase order. This documents the item(s), quantity, delivery terms, and price.
You request a cost estimate from your supplier to fulfill that order. That tells you how much funding you need to make the purchase.
You submit the purchase order, supplier information, and related documentation to a PO financing firm for evaluation.
The lender reviews the creditworthiness of your customer, the supplier’s reliability, your business track record, and order details.
Once approved, the financing company pays your supplier directly—either in full or a partial advance (often 70%–90% of the supplier’s invoice cost)
Your supplier manufactures or sources the goods and delivers them to your customer.
You send an invoice to your customer for the full amount in the purchase order.
Your customer pays the PO financing company (sometimes directly). The lender then deducts its fees and remits the rest to you.
The transaction is concluded. The PO financier collects its fees and disburses your net proceeds.
A visual flowchart of this multi-party arrangement can be seen above. (Image alt text: “Purchase Order Financing process steps between business, supplier, financier, and customer.”)
Knowing the jargon helps you navigate proposals and contracts. Here are essentials:
| Term | Meaning |
|---|---|
| Advance Rate | The percentage of supplier cost the lender pays (e.g., 80%) |
| Fee / Discount | The cost charged for the financing, often expressed as a percentage of the order |
| Underwriting / Risk Review | Analysis of customer credit, supplier reliability, and deal viability |
| Factoring / Invoice Financing | A related concept: advancing money based on invoices rather than purchase orders |
| Repayment / Settlement | Collecting payment from customer, deducting fees, and returning remainder to you |
This isn’t a blanket funding option for every business. Typically, the following profiles make viable candidates:
B2B or B2G sales: Selling to other businesses or government customers.
Physical goods: Businesses dealing in tangible inventory (manufacturers, distributors, importers).
Validated purchase orders: You already have a bona fide customer order.
Strong customer credit: Lenders rely mostly on your customer’s ability to pay.
Reliable supplier track record: The supplier must be trustworthy and capable.
Reasonable margins: Business must show profitability after fees.
Startups or small businesses with limited histories may still qualify if their customers are creditworthy.
One of the main concerns around what is purchase order financing is “How much does it cost?” Here’s how pricing generally works:
Fee / Discount rate: Typically 1.8% to 6% per month on the financed amount (flat fee basis)
Term length impact: Shorter deals (e.g. 10–30 days) tend to cost less. Longer fulfillment cycles raise the effective rate.
Advance rate effect: If you only get 80% funding, you’ll absorb the remaining 20% cost yourself.
Due diligence / setup fees: Some providers charge application, inspection, or audit fees.
Inspection / shipping oversight costs: In some cases, independent quality checks or inspections are required.
Collection / receivables risk: If your customer delays or fails to pay, you may incur extra costs or risk.
Because you’re only using PO financing for a specific order, it doesn’t usually impose long-term debt. But it’s more expensive per-dollar than many standard loans
Here’s why businesses often choose this tool:
Bridge cash flow gaps
It allows you to accept large orders even without working capital.
No need to use existing credit lines
You preserve existing bank lines for other uses.
Access growth opportunities
You don’t have to decline profitable orders due to lack of funds.
Fast turnaround
Approval and funding times are generally quicker than traditional bank loans.
Limited collateral
The order and expected receivable stand as the collateral, rather than your entire business assets.
Align risk with order
Because it’s tied to a specific order, you’re not over-leveraging your entire operations.
Credit based on customer
The focus is less on your credit history and more on your customer’s ability to pay.
It’s not always ideal. Here are common drawbacks:
High cost
The effective annualized rate can be steep compared to traditional loans.
Limited to order-related costs
You can’t use it to pay for rent, wages, or overhead—just goods or materials.
Customer pays directly to financier
You may lose control of the receivables and collection process.
Dependence on customer credit
If your customer’s credit is weak, your application could be rejected.
Complexity and documentation
Multiple participants and strict documentation make it heavier to manage.
Not a long-term solution
Meant for short-term order bridging—not ongoing working capital needs.
Risk of nonpayment
If your customer refuses or delays payment, you may bear additional liability.
These concepts are related but distinct:
| Feature | Purchase Order Financing | Invoice Factoring / Invoice Financing |
|---|---|---|
| Stage | Before goods are fulfilled (pre-shipment) | After goods are delivered (receivables) |
| Collateral | Purchase order + goods in transit | Unpaid invoices |
| Use of funds | To pay suppliers | To access cash from unpaid invoices |
| Repayment | Customer pays financier directly | Same, or factoring company pays you after collection |
| Cost structure | Often flat fees per order | Discount rate or factoring fees on invoice amount |
If you’ve already shipped goods and have invoices outstanding, you may want to explore invoice factoring instead of PO financing.
Let’s illustrate what is purchase order financing with two simplified scenarios.
A retailer issues a PO for $100,000 worth of smartphones.
The distributor doesn’t have $70,000 in inventory and can’t tap working capital.
The distributor applies for PO financing. The lender agrees to 80% funding of supplier costs—that’s $56,000.
Supplier ships the units to the retailer.
Retailer pays the lender $100,000.
The lender deducts, say, 4% fee ($4,000), then remits $40,000 to the distributor.
A business orders custom furniture worth $50,000.
The manufacturer needs to purchase raw materials and production costs up front.
PO financing company funds 90% of supplier costs ($45,000).
Manufacturer delivers goods.
Customer pays financing company. After fees, the remainder goes to manufacturer.
These examples show how PO financing leverages customer obligations to free up your capital.
Here are some situations where what is purchase order financing becomes especially relevant:
You’ve landed a large order beyond your current budget.
Growth is accelerating and you need to scale quickly.
Your existing credit lines are maxed out.
You’re onboarding new clients and don’t want to risk capital.
Your business has seasonal highs that require inventory surges.
You lack strong financials to qualify for traditional loans.
If none of these scenarios apply, other funding options may better suit your needs.
Selecting the right partner is crucial. Consider these criteria:
Experience in your industry
Providers familiar with your market understand risks better.
Transparent pricing and fees
Watch for hidden setup or audit costs.
Advance rate flexibility
Some will finance 100%, others only 70–90%.
Speed of funding
How fast can they vet and release funds?
Due diligence burden
Some firms require stricter documentation, inspections, or oversight.
Reputation & references
Look into other clients, online reviews, and case studies.
Flexibility in future deals
You may want to scale funding or adjust based on growth.
Follow this roadmap to be ready:
Prepare your documentation
The original purchase order
Supplier quotes / pro forma invoices
Business financials (bank statements, P&L)
Customer history or credit profile
Details about your supplier
Submit your application
Most providers have an online portal or contact point.
Underwriting & risk review
The lender evaluates your customer’s credit, supplier reliability, and your business profile.
Due diligence & inspection (if required)
The financier may inspect goods, shipping plans, or supplier capacity.
Funding & release to supplier
Funds are released to your supplier to proceed with the order.
Shipment & delivery
Supplier ships goods to your customer.
Invoice & payment collection
You issue invoice; customer pays the financing provider directly.
Settlement / remittance
Financier deducts fees and sends you the remaining proceeds.
Adhering to this structured workflow ensures smoother approval and reduces surprises.
What is purchase order financing?
It’s a method for businesses to get funds to pay suppliers when they’ve already received a confirmed order but don’t have the cash on hand.
How it works:
A lender pays the supplier, goods are shipped, the customer pays the lender, fees are deducted, and the balance goes to you.
Who can use it:
B2B or B2G companies selling physical goods with validated purchase orders and customers with solid credit.
Costs & risks:
Fees can range 1.8%–6% monthly. Risks include high cost, documentation demands, and reliance on customers’ credit.
Pros:
Open growth opportunities, quicker turnaround, preserve existing credit lines.
Cons:
Expensive compared to traditional loans, limited use, complexity.
Best use cases:
Large orders beyond cash capacity, seasonal surges, scaling business.
Selection & application:
Evaluate providers’ industry experience, flexibility, pricing, and process ease. Follow a structured application workflow.
Ready to turn your next big order into revenue — not a cash-flow headache? Contact us today to explore how much funding you can unlock against that purchase order.