Purchase Order Financing: How It Works, Rates and Terms

Table of Contents

Did your business just land a major order, but you lack the upfrontfunds to fulfill it? You’re not alone. For many companies, the biggest challenge isn’t getting orders — it’s having the capital to pay suppliers. The good news is that purchase order financing(P.O. financing) can help you deliver on large contracts without straining your cash flow.

With P.O. financing, you can access up to 90% of the supplier costsrequired to fulfill a customer order.

In this guide, we’ll break down how P.O. financingworks, what it costs, who it’s ideal for, and how to get started in securing the cash advanceyou need to secure growth opportunitiesfor your business.

What Is Purchase Order Financing?

Purchase order financingis a form of short-term business fundingwhere a finance company pays your supplier directly to fulfill a customer’s purchase order.

Once the order is shipped and invoiced, the financing company/lendercollects payment from your customer, subtracts its fees and the amount advanced, and sends you the remaining balance.

P.O. financingis a popular type of financingfor businesses that don’t have the cash to cover large supplier payments upfront. P.O. financing companiesadvance between 70% and 100% of the order amount. After paying the vendor, they wait until the customer pays to recover the funds and deduct their fees.

How Does Purchase Order Financing Work?

Funding amounts for purchase order financingtypically cover 70% to 90% of your supplier’s invoice, though in some cases, 100% funding is possible, though rare. As for timing, first-time approvals generally take between one and two weeks, while returning clients can often receive financing in just a few days.

As for purchase order financing costs, most providerscharge 3% to 6% per month. Short-term deals may be around 2% for 10–15 days. These are flat fees, not interest-based.

Four different participants take part in a P.O. fundingtransaction:

You (the seller/borrower)
Your customer (the buyer)
Your supplier
The purchase order financing company(lender)

Here’s how the P.O. funding process works

You get a purchase order from a customer and an estimate from your supplier, and contact a P.O. finance company.
Approval process: The P.O. finance companychecks the credit historyof your client and supplier.
If approved, the creditor advances your supplier 70 to 100% of the purchase order cost.
Your supplier delivers the order.
You issue an invoice to your client.
The customer sends the payment to the P.O. financing company(or gets payment terms, and you factor the invoice).
The P.O. financing companyreceives the money, discounts its fees and amount paid to the supplier, and sends the balance to your bank account.

Purchase Order Financing Example

Building Contractor Inc. wants to buy some electrical outlets that you distribute and has placed a purchase order for $100,000. You contact your supplier, Electrical Manufacturer LLC, and get an estimate for $60,000. Unfortunately, you don’t have enough working capitalto cover those goods’ costs.

Here’s how you would get purchase order financingto help:

You contact a purchase order finance companyand request financing.
The P.O. financing companyevaluates the order and assesses your client’s financial background and credit history. Then, it does the same with your supplier. If the analysis is satisfactory, the financing is approved.
Your business signs a purchase order (P.O.) financing agreement with the financier, which includes the following terms: 80% of the estimated amount is financed, and you are responsible for covering the remaining 20%. A fee of 4% applies every 30 days.
The P.O. financing companyissues a letter of creditor a vendor guarantee to Electrical Manufacturer LLC.
After a 30-day wait, the products are delivered to Building Contractor Inc.
The P.O. financing companypays the electrical manufacturer $48,000, and you pay the $12,000 balance.
You send Building Contractor Inc. an invoice.

At this stage, two things can happen:

Your customer immediately pays the P.O. financing company. We’ll keep explaining this option in this example.
You give your client payment terms (e.g., 60 days from invoice date) and use invoice factoringto cancel the 80% advance and get financing until the customer pays. You can read more about how this process works later in this document.

Building Contractor Inc. pays right away. The P.O. financier receives the $100,000 payment. Then it discounts the $48,000 paid to the supplier and $1,920 in fees (4% pre-agreed) and sends you the remaining $50,080.

Who Uses Purchase Order Financing?

P.O. financingworks best for product-based businesses that need help covering supplier costsfor large orders.

Eligible business types include:

Wholesalersand distributors
Importers
Exporters
Small business owners
Manufacturers
Government contractors
Resellersand drop shippers
Previous GCF customers with a good track record

It’s most useful for:

Poor or limited credit history
Cashflow gaps
Alternative financing solutionshave failed
Seasonal cash flowshortages
A sudden surge in orders
Rapidly scaling startups
Limited access to traditional bank financing, credit cards, or a line of credit
All other financing optionshave faltered

Note: Service-based businesses typically don’t qualify for P.O. financing.

Pros and Cons of Purchase Order Financing

Advantagesof purchase order financinginclude:

Easier to qualify for than traditional loans
It doesn’t show up as debt
No personal guarantees are required
Collection handled by a financier
Based on the creditworthiness of your customers
Fast approval and funding
Keeps working capitalavailable
Enables you to fulfill larger orders

The potential disadvantagesare:

Rarely covers 100% of the supplier cost
Your customer will know a third party is involved
Only available for tangible product sales
More expensive than bank loans
Some companies only fund large P.O.s
Customers and suppliers must be creditworthy

What Does Purchase Order Financing Cost?

The following are the most common terms in P.O. financingagreements today.

Purchase Order Financing Rates

P.O. financingrates can vary considerably among providersand transactions. The most common are 3 to 6% per month, but a few providersoffer terms as short as 7 to 15 days (e.g., 2% for 10 days).

Essentially, P.O. Fundingis an unsecured loan, and the discount fees reflect the risk each transaction involves. Still, the costs are low in comparison to short-term alternative loans.

Amount Financed

With P.O. funding, advances are provided to cover the cost of supplies, typically between 70% and 90% of a purchase order amount. 100% finance is not impossible to get but very unusual.

Funding Speed

The first time you request financing for specific clients and providers, the transaction can take 1 to 2 weeks to fund. Repeated deals and ongoing relationships can be funded in just a few days.

P.O. Financing & Invoice Factoring: A Two-Part Strategy

Our company exclusively provides purchase order fundingservices to businesses that commit to utilizing factoring services after the order has been delivered.

Invoice factoringis a financial transaction frequently used by businesses with weak cash flowthat give their customers payment terms. Instead of waiting to get paid, the business sells the receivable to a factoring companyand receives a cash flowadvance. Then, the factor waits for the payment, deducts its fees, and gives the business the balance.

It’s very common for businesses to factor the invoices right after the orders are delivered because factoring is cheaper than purchase order funding. Instead of paying the typical purchase order financefees of 3 to 6% a month while waiting to get paid, you can save money by taking advantage of the 1 to 3% invoice factoringrates.

Here’s how it works:

The receivable is factored right after the supplier delivers the goods and the business issues a bill.
A portion of the invoice factoringadvance is used to pay off the purchase order financingamount and fees owed.
The arrangement becomes an invoice factoringdeal, financed until the debtor pays.

This strategy prevents cash flowcrunches and helps you save money by considerably decreasing the amount paid in financing fees.

You can learn everything about invoice factoringand how it works here.

Working With Our Purchase Order Funding Company

We can help growing businesses finance their ability to fulfill purchase orders. We provide funding to buy materials and finished products, pay workers, or any other input needed to complete the sale and generate an invoice.

P.O. Financing FAQ

Have questions about how purchase order financing works, what you need to qualify, or how it compares to traditional financing? Here are some quick answers to help you understand the essentials.

What’s the difference between purchase order financingand invoice financing?

Purchase order financinghelps you pay suppliers before the goods are delivered, while invoice financing(or factoring) provides funding after you’ve invoiced your customer. We combine both for a seamless cash flowsolution.

Do I need a strong credit scoreto qualify for P.O. financing?

Not necessarily. Approval is based more on your customers and suppliers’ creditworthinessthan your own. This makes P.O. financingaccessible even if your business has a limited credit history.

Is purchase order financingbetter than a business loanor line of credit?

It depends on your situation. P.O. financingis faster and easier to qualify for than traditional financingand doesn’t add debt to your balance sheet. However, a business loanor business line of creditmight offer lower long-term costs if you qualify.

What financial statementsare needed to apply?

Typically, you’ll need to provide recent financial statements, supplier estimates, and the purchase order from your customer to begin the underwritingprocess.

How does underwritingwork for P.O. financing?

The underwritingprocess includes a review of your accounts receivable, customer and supplier creditworthiness, and any prior qualifyingbusiness activity. This ensures the transaction is low-risk for all parties involved.

Our Purchase Order Financing Services

We help small and mid-sized businesses fund the goods they need to fulfill large customer orders. We offer:

P.O. financingfrom $50,000 to $250,000
Letters of creditor vendor guarantees
Quick approvals based on your customer’s creditworthiness

Reminder: We only provide P.O. financingwhen paired with invoice factoring.

Why Partner With Us?

Fast, dependable funding
Competitive interest rates
Our application processis easy

Stronger supplier relationships
Confidence to take on larger contracts
Meet delivery deadlines and grow with ease

Ready To Move Forward?

Stop turning down large ordersbecause of limited cash flow.
Call 1-855-424-2955 to speak with our P.O. financingteam. We’ll walk you through your options and help you grow — deal by deal.

Author Marc J Marin