What Is Purchase Order Financing? How It Works, Costs & When to Use It

Fulfilling large customer orders can be a major growth opportunity. But what if you don’t have the cash on hand to make it happen? Whether you’re a manufacturer, distributor or importer, upfront supplier costs can strain your working capital and slow down operations. That’s where purchase order financing comes in.

This financing solution helps businesses secure the funds they need to pay suppliers based on verified customer orders. Rather than turning down big deals or taking on debt, companies can use P.O. financing to bridge the gap between receiving a purchase order and getting paid.

In this guide, we’ll explain what purchase order financing is, how it works, what it costs and whether it’s the right fit for your business.

How Does Purchase Order Financing Work?

Purchase order financing provides the upfront capital your business needs to pay suppliers and fulfill customer orders. It’s not a loan in the traditional sense. Instead, the financing is based on the strength of a confirmed purchase order from a creditworthy customer.

Here’s how the process typically works:

1. You receive a large purchase order from a customer but don’t have enough capital to fulfill it.
2. You apply for purchase order financing, submitting details about the order, your customer and your supplier.
3. The financing company pays your supplier directly, often through a letter of credit or direct payment, so production can begin.
4. Your supplier manufactures and ships the goods to your customer.
5. You invoice the customer, but instead of paying you, the customer sends payment directly to the financing company.
6. The financing company deducts its fees and sends the remaining balance to you.

Because this model focuses on the creditworthiness of your customer, not your business, it’s a valuable option for companies that are growing quickly or have limited cash flow.

Keep in mind: if your supplier is delayed or your customer takes longer than expected to pay, you may face additional interest charges or need to offer payment discounts. Be sure to review terms carefully and plan for potential timeline risks.

How Much Does Purchase Order Financing Cost?

The cost of purchase order financing typically ranges from 1.8% to 6% per month of the total purchase order value. This fee can vary based on the size of the order, the reliability of your supplier, your customer’s credit profile and the complexity of the transaction.

In most cases, P.O. financing is structured as a short-term funding solution, and costs accrue until your customer pays the invoice. While it’s not the cheapest form of financing, it can be well worth the investment if it enables you to take on large, profitable orders that would otherwise be out of reach.

Here’s what may factor into the total cost:

• Advance amount: Some lenders fund 80–100% of supplier costs
• Length of the production and payment cycle: Longer timelines may increase costs
• Risk level: Higher-risk industries or international shipments may have higher fees
• Additional charges: Some providers add service fees, due diligence fees or wire transfer fees

It’s important to run the numbers. If your expected profit margin is too low, the financing fees may eat into your gains. Most lenders require a minimum margin, often around 20%, to ensure the deal makes financial sense for everyone involved.

Who Uses Purchase Order Financing (P.O. Financing)?

Purchase order financing is used by businesses that receive large orders but lack the upfront capital to fulfill them. It’s especially valuable in industries where suppliers require payment before production or delivery, and waiting on customer payments isn’t an option.

P.O. financing is commonly used by:

• Manufacturers needing to cover raw materials and production costs before shipment
• Wholesalers and Distributors handling bulk orders with tight turnaround times
• Importers and Exporters managing cross-border transactions with large suppliers
• Retailers preparing for seasonal demand or large-volume contracts

These businesses often face cash flow gaps between order receipt and payment. P.O. financing bridges that gap, allowing them to accept (and profit from) orders they might otherwise have to turn down.

It’s also a strategic fit for fast-growing businesses that are rich in opportunity but short on liquid capital. Rather than missing out on high-value deals or overleveraging with long-term debt, they use purchase order financing to move forward with confidence.

How to Qualify and Apply for Purchase Order Financing

Applying for P.O. financing involves thorough preparation and comprehension of lender criteria. While time-consuming, this process is vital for businesses needing financial support for substantial orders.

Requirements for Obtaining P.O. Financing

To qualify for P.O. financing, businesses generally need to:

• Have a creditworthy business customer.
• Maintain a good reputation and financial health for your business.
• Have relevant experience and a clean legal record as a business owner.
• Ensure a minimum profit margin (usually around 20%) on the order.
• Ensure purchases are non-cancelable.
• Have a history of fulfilling similar orders or a strong operational background.
• Meet a minimum order size set by the financier.
• Prepare detailed information about the purchase order, including customer details and supplier costs.

How to Apply for Purchase Order Financing

1. Research and Select a Lender: Research P.O. financing providers to find one that best suits your business needs.
2. Gather Required Documentation: Prepare the necessary documents, including the customer’s purchase order, your supplier’s invoice, your invoice to the customer and your purchase order to your supplier.
3. Submit Business and Legal Information: Provide detailed business information and any pertinent legal information (e.g., pending lawsuits).
4. Financial Statements and Tax Filings: Collect and submit your business’s financial statements, such as profit and loss statements, balance sheets and recent tax filings.
5. Apply: Once all documents and information are ready, submit your application to the chosen P.O. financing provider.

Advantages of Purchase Order Financing

When cash flow is tight, but opportunity is knocking, purchase order financing can provide a critical lifeline. By covering supplier costs upfront, it allows businesses to fulfill large customer orders without tying up internal capital or taking on long-term debt.

Here are some of the key benefits of using P.O. financing:

• Say Yes to Bigger Orders: Don’t turn down large contracts just because you lack the upfront cash. P.O. financing gives you the ability to take on more business, even orders that exceed your current capacity.
• Preserve Working Capital: Use external funding to pay suppliers while keeping your cash reserves available for other priorities like payroll, operations or marketing.
• Faster Access to Funding: Compared to traditional bank loans, purchase order financing has a quicker approval process and less red tape, so you can move forward without delay.
• No Collateral Required: P.O. financing is typically unsecured, meaning you don’t have to risk company assets. Approval depends more on your customer’s credit than your own.
• Flexible and Scalable: Financing amounts grow with your orders, making this a dynamic solution for companies with seasonal spikes or fluctuating demand.
• Supports Business Growth: Instead of turning down opportunities due to cash flow limitations, you can confidently scale operations and build stronger client relationships.

What’s the Difference Between Purchase Order Financing and Factoring?

Though they’re often used together, purchase order financing and invoice factoring serve two very different purposes.

Purchase order financing gives you the funds to produce or source goods for a customer order you’ve already secured. It kicks in before delivery—when you need capital to pay your supplier and get the order moving.

Invoice factoring steps in after delivery. Once you’ve invoiced your customer, factoring lets you unlock that money right away instead of waiting weeks (or months) for payment.

Think of it this way:

• Purchase order financing helps you say yes to big orders.
• Invoice factoring helps you get paid faster for completed ones.

How Purchase Order Financing and Invoice Factoring Work Together

Combined, purchase order financing and invoice factoring create a powerful cash flow engine, helping you grow without the wait. At ei Funding, we pair both services to support businesses from production through payment, keeping you funded at every stage.

Invoice factoring provides immediate funding for invoices tied to completed work that’s still awaiting customer payment. Once that relationship is in place, your business can also access purchase order financing to support the front end, covering supplier costs based on new, verified purchase orders.

While invoice factoring accelerates payment on completed sales, P.O. financing unlocks the capital needed to fulfill new ones. Used together, they give your business continuous access to working capital from order acceptance to final collection.

Purchase Order Financing FAQs

What is an example of P.O. financing?

Let’s say a manufacturer receives a large order from a national retailer but doesn’t have the funds to cover production. With purchase order financing, a lender pays the supplier directly so the goods can be produced and shipped. Once the retailer receives the order, they pay the lender, who then deducts their fee and passes the remaining funds to the manufacturer.

What are the typical terms for P.O. financing?

Fees typically range from 1.8% to 6% per month on the financed amount. Terms may also include administrative or processing fees. Costs accrue until your customer pays the invoice, so longer production and payment cycles can increase the total expense. Most lenders require a minimum 20% profit margin to ensure the deal remains financially viable.

What is the risk of purchase order financing?

Risks include delays from your supplier, which can drive up financing costs and hurt profit margins. Because the financing depends on your customer’s ability to pay, their creditworthiness is critical. Unexpected delays or canceled orders can lead to financial strain if timelines or terms aren’t clearly managed.

Can small businesses use purchase order financing?

Yes, many small and growing businesses use P.O. financing to fulfill larger orders they wouldn’t be able to fund on their own. While approval depends on factors like your customer’s credit and order size, you don’t need to be a large company to qualify.

What are the different types of purchase orders?

Types include standard, planned, blanket and contract purchase orders, each serving different procurement needs.

• Standard purchase orders contain all details of an order, including items, quantities, pricing and delivery specifics.
• Planned purchase orders outline items and quantities but leave delivery details to be confirmed later.
• Blanket purchase orders specify only general terms, with details like quantities and delivery dates to follow in separate releases.
• Contract purchase orders establish negotiated terms and conditions that subsequent purchase orders reference.

Do I need invoice factoring to use purchase order financing?

At ei Funding, yes. We require an active invoice factoring relationship to offer purchase order financing. This ensures a smooth flow of capital from order fulfillment through payment collection, giving your business a full-cycle funding solution.

Is Purchase Order Financing Right for My Business?

Purchase order financing offers a dynamic way to boost cash flow and access essential capital more rapidly than standard customer payment cycles. It’s also crucial to recognize its interplay with invoice factoring. While P.O. financing addresses the need to secure upfront materials for large orders, invoice factoring ensures continuous cash flow by advancing funds on your invoices.

P.O. financing could be right for your business, but with ei Funding, you must utilize invoice factoring alongside it, as P.O. financing is not designed as a standalone service. By using these two complementary services, you can get the complete financial solution you’ve been looking for to support both ends of your sales cycle.

Get Started With ei Funding

Navigating the intricacies of P.O. financing and invoice factoring can seem daunting, but you don’t have to tackle it alone. Partnering with ei Funding gives you access to bespoke advice and solutions. We’re more than just a financial service; we’re a partner in your success. Our team is dedicated to understanding your business’s specific goals, cash flow patterns and growth aspirations, ensuring you make a financing choice that aligns with your long-term vision.

Ready to explore how purchase order financing can transform your business? Reach out to ei Funding today! Let our experts help set your business on the path to the growth and success you envision.