Purchase order financing helps you say yes to a big customer order when you do not have the cash to buy the goods. A lender pays your supplier, your supplier ships the order, and your customer pays the lender. You keep the profit after fees.

This guide explains how purchase order financing works, what it costs, and who it fits. It also shows how it differs from invoice factoring, so you can pick the right tool for your cash flow gap.

What Is Purchase Order Financing?

Purchase order financing is short-term funding that covers the cost of filling a confirmed customer order. It is built for businesses that sell physical products and have a purchase order (PO) in hand but not the money to produce or buy the goods.

Lenders look closely at your customer's credit, not just yours. That makes it an option for newer businesses that may not qualify for a bank loan.

How Does Purchase Order Financing Work?

A lender pays your supplier directly, so your supplier can make and ship the order to your customer. When your customer pays, the lender takes its fees and sends you the rest.

Fit Small Business describes the process in these steps:

• You receive a PO from a business or government customer.
• You get a cost estimate from your supplier.
• The lender reviews the order and the credit of your business and your customer.
• If approved, the lender pays your supplier, often up to 100% of the order cost.
• The supplier delivers the goods, and your customer is invoiced.
• Your customer pays the lender, usually within 30 to 120 days.
• The lender deducts its fees and sends you the balance.

How Much Does Purchase Order Financing Cost?

Fit Small Business reports fees of about 1% to 6% per 30 days. It estimates the APR at 20% to 80%. Funding amounts range from $10,000 to $10 million, based on the same source.

Fees add up each month until your customer pays. A slow-paying customer raises your total cost. Check your profit margin before you apply, because the fees have to fit inside it.

Who Qualifies for Purchase Order Financing?

Most lenders want a few things before they approve an order:

• A confirmed PO from a business or government customer, not an individual shopper.
• An order for finished, tangible goods. Services usually do not qualify.
• A creditworthy customer and a creditworthy business.
• A profit margin large enough to cover the fees.
• Documents such as the PO, the supplier cost estimate, and financial records.

Some lenders also ask for upfront fees or a personal guarantee. Read the terms closely before you sign.

Purchase Order Financing vs. Invoice Factoring

The two tools solve different timing problems. Purchase order financing helps you fill an order before you have an invoice. Invoice factoring gives you cash against invoices you have already issued.

If your goods are delivered and your customer owes you money, read our invoice factoring guide. For general cash needs, see our explainer on working capital loans.

Frequently Asked Questions

Is Purchase Order Financing Right for Your Business?

Purchase order financing can turn a large order you cannot afford into real revenue. It works best when you sell physical goods to creditworthy business or government customers and your margins can absorb the fees.

Not sure which funding fits? Merchant Flow Financial can review your situation and match you with options. Contact us or start an application to see what you qualify for.