PO Financing: A Practical Guide to Purchase Order Financing

What is PO Financing?

Overview

Purchase order (PO) financing is a funding arrangement where a lender pays a supplier to fulfill a buyer's order. The financing is secured by the purchase order and, in many cases, the buyer’s credit profile. It helps a growing company fulfill large orders without tying up cash in production and fulfillment.

How it differs from factoring and reverse factoring

• Factoring: the seller assigns its receivables to a funder, who advances a portion of the invoice value and collects payment when the buyer pays.
• PO financing: the lender funds the supplier to produce and ship goods for a specific PO; the borrower repays the lender when the buyer pays the invoice, without transferring ownership of the receivable.
• Reverse factoring (supply chain finance): a bank or financer pays suppliers based on the buyer’s creditworthiness, often extending favorable payment terms to the buyer.

How Purchase Order Financing Works

Step-by-step flow

1. A buyer places a purchase order with a supplier for goods or services.
2. The supplier requests PO financing to fund production or fulfillment of that order.
3. The financing company funds the supplier directly to cover production, materials, and labor.
4. The supplier ships the goods to the buyer.
5. The buyer pays the invoice to the financing company or to the borrower, depending on the contract.
6. The financing company repays itself from the payment, with any excess remitted to the borrower after fees.

Key players

• Borrower (the business selling to the buyer)
• Supplier (the goods or services provider)
• PO financing lender (the funder)
• Buyer (origin of the PO)

Who Uses PO Financing

Typical industries

Manufacturers, distributors, and service providers that fulfill large, time-sensitive orders for a buyer who may have favorable payment terms.

Size and growth stage

Small to mid-sized businesses often use PO financing to scale quickly without a heavy cash outlay or to bridge gaps while waiting for customer payments.

Benefits and Drawbacks

Benefits

• Accelerates order fulfillment and helps meet contractual deadlines.
• Improves cash flow without diluting equity.
• Supports growth during peak demand or seasonality.
• Can preserve supplier relationships by ensuring timely payments.

Drawbacks

• Costs can be higher than traditional financing and vary by order and risk.
• Reliant on the buyer’s creditworthiness and the existence of a solid PO.
• Complex terms and conditions may apply, including eligibility requirements and reporting.
• Potential risk if the buyer delays/postpones payment; funding terms and recourse vary by provider.

Costs, Terms, and Considerations

Typical fees and rates

Fees often include a facility fee or management fee plus a discount or interest rate tied to the order risk. Total cost depends on order size, duration, industry, and the buyer’s credit.

Term lengths

Most PO finance arrangements are short-term, aligned with the time it takes to fulfill the PO and collect payment, typically ranging from 30 to 180 days.

Eligibility and documentation

Lenders usually require a legitimate purchase order, supplier details, buyer information, and basic financials. Some programs may review supplier risk, product type, and the buyer’s payment history.

How to Choose a PO Financing Provider

Things to compare

• Funding speed and ease of use
• Fees and total cost of financing
• Industry experience and lender reliability
• Flexibility on supplier eligibility and geography
• Transparency of terms and reporting requirements

Due diligence tips

• Ask for client references and case studies.
• Review contract terms, including recourse, fees, and cure periods.
• Clarify post-funding support, reporting, and any audit rights.
• Consider how changes in buyer credit or PO terms affect you.

When PO Financing Makes Sense

Scenarios

• You have a strong order backlog but limited working capital to fulfill large POs.
• You want to win contracts by guaranteeing on-time fulfillment without tying up cash.
• You’re experiencing seasonal spikes and need a short-term liquidity bridge.

Alternatives to consider

• Traditional lines of credit or credit facilities.
• Factoring or invoice financing.
• Supplier credit programs or vendor financing.
• Inventory financing or asset-based lending.