How Businesses Can Use Purchase Order (PO) Financing

Purchase order (PO) financing is a funding solution designed to help businesses meet large customer orders they might not have the cash flow to fulfill. With PO financing, a lender or financing company provides funds to cover the costs of goods required to complete an order. This type of financing allows businesses to grow, maintain relationships with suppliers and deliver products on time without depleting their own resources. For business owners navigating cash flow challenges or aiming to scale operations, working with a financial advisor can offer insights into whether purchase order financing is the right option.

A financial advisor can provide good insight for business owners looking to manage their full financial picture.

What Is Purchase Order (PO) Financing?

Purchase order financing is a short-term funding solution that enables businesses to pay suppliers for goods needed to fulfill customer orders. This financing is typically used by wholesalers, manufacturers, distributors or resellers who receive large purchase orders but often lack the capital to procure the necessary inventory upfront.

For example, a distributor receives a $100,000 order from a retail client but do not have the funds to pay the supplier. A PO financing company agrees to cover the supplier’s invoice, allowing the distributor to complete the order. Once the retailer pays for the goods, the financing company deducts its fees and sends the remaining balance to the distributor.

This type of financing is particularly beneficial for businesses with strong sales pipelines but limited working capital, enabling them to meet customer demands without overextending their resources.

How Does Purchase Order (PO) Financing Work?

Purchase order financing is pretty straightforward once you understand how to navigate the process. The specific process of purchase order financing typically involves the following steps:

Receive a purchase order: A customer places a large order with your business, which requires more capital than you have available to fulfill.
Apply for financing: Submit the purchase order and supplier invoice to a PO financing company. The lender evaluates the order and your customer’s creditworthiness.
Approval and funding: If approved, the financing company provides funds directly to your supplier to cover the cost of goods.
Order fulfillment: Your supplier produces and delivers the goods to your customer.
Customer payment: Once the customer pays the invoice, the financing company deducts its fees and remits the remaining balance to you.

Consider a small apparel company that secures a bulk order from a major retailer. Lacking the funds to manufacture the garments, the company turns to a PO financing provider. After reviewing the retailer’s credit, the provider pays the apparel company’s supplier, ensuring timely delivery. When the retailer pays the invoice, the financing company takes its cut, and the apparel company keeps the profit.

The Benefits of Purchase Order Financing

How Businesses Can Use Purchase Order (PO) Financing

Purchase order financing offers several advantages for businesses with varying degrees of helpfulness, depending on the needs of your business. Here are some of the most common benefits to consider:

Improved cash flow: PO financing provides immediate capital to cover supplier costs, eliminating the need to tie up your funds. This allows businesses to maintain smooth operations without sacrificing liquidity.
Scalability: Businesses can accept larger orders without worrying about funding constraints. This scalability enables companies to grow and establish themselves in competitive markets.
Preservation of equity: Unlike equity financing, PO financing does not require you to relinquish ownership of your business. You retain full control while accessing the funds needed to expand.
Strengthened supplier relationships: By ensuring timely payments to suppliers, PO financing helps maintain strong relationships, fostering trust and long-term partnerships.
Faster growth: With access to funding for large orders, businesses can take on more significant opportunities and scale their operations more quickly.

How to Set Up Purchase Order Financing

It’s important to make sure you’re prepared for financing before you apply. Setting up purchase order financing involves a few key steps:

Identify a reputable PO financing provider: Research companies specializing in PO financing, such as BlueVine or Fundbox. Compare fees, terms and customer reviews to find the best fit for your business.
Gather documentation: Prepare your purchase orders, supplier invoices and financial statements. Lenders may also require details about your customer’s creditworthiness.
Submit an application: Apply for financing by providing the necessary documents. The lender will assess your eligibility based on factors such as your customer’s payment history and the size of the order.
Review and accept terms: If approved, review the financing agreement carefully. Pay attention to fees, interest rates and repayment terms before signing.
Receive funding: Once approved, the financing provider pays your supplier directly, enabling you to fulfill the order.
Repay the loan: After your customer pays the invoice, the lender deducts its fees and remits the remaining funds to your business.

Bottom Line

Purchase order financing is a valuable tool for businesses looking to fulfill large customer orders without straining their cash flow. By providing the capital needed to pay suppliers, PO financing helps companies grow and maintain customer satisfaction while strengthening supplier relationships. Whether you are scaling operations or navigating a cash flow crunch, partnering with a financial advisor can help you explore purchase order financing options and integrate them into your broader financial strategy.

Tips for Financial Management

As a business owner, it’s important to have professional advice for your personal finances as well as your business. A financial advisor can help you with your own assets and make sure you’re investing them correctly to reach your long-term goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goal, get started now.
Utilizing an investment calculator can help you determine how your money will grow over time.