Purchase Order Financing: Filling a Big Order Without the Cash

How a PO financing deal is built

A financer pays your supplier directly, you deliver to your customer, and the customer's payment repays the financer.

You win an order, say 5,000 units for a retail chain, but your supplier wants payment before shipping. The PO financer reviews the order, your customer's creditworthiness and your supplier's reliability. If it approves, it pays the supplier, often through a letter of credit or direct payment.

The goods ship to your customer. When the customer pays the invoice, the financer takes its fee and any principal, then sends you the balance. The structure keeps cash from ever passing through your account until the end, which is also why the financer is strict about who is involved.

What it costs, with an illustrative example

Fees are usually charged per 30 days the deal is open, so slow customer payment makes it more expensive.

Illustrative example: a $100,000 order with a $60,000 supplier cost. Suppose the financer charges a fee in the low single digits percent of the funded amount per month, and your customer pays in 60 days. The fees on $60,000 could run to a few thousand dollars, and your gross profit on the deal is $40,000 before that fee. The deal still works.

Now assume the customer pays in 120 days instead. The fee doubles, and the profit shrinks. Always ask how the fee accrues and what happens if the customer pays late. Rates vary by financer, so get the terms in writing.

Who it fits and who it does not

It fits resellers and distributors with strong margins and reliable customers, and it fits poorly when margins are thin.

• Good fit: product resellers, importers and distributors with credit-worthy buyers and gross margins around 20 percent or more.
• Poor fit: service businesses, custom manufacturing with changing specs, or any deal where the supplier cannot be paid directly.
• Risky: orders from buyers with weak payment history, or goods with long shipping times.

Thin margins matter most. If fees take a third of your profit, the order may not be worth filling.

What ROI Funder offers instead

Working capital, a business line of credit or a term loan can cover supplier costs when PO financing is not available.

ROI Funder does not place purchase order financing. If your business has 6+ months of history, $20,000+ in monthly revenue and 500+ FICO, general funding can pay the supplier. Working capital can arrive the same business day on approved, complete files. A line of credit works well for repeat orders because you draw, repay when the customer pays, and redraw.

These products are underwritten on your overall sales, not on one order. That makes them more flexible, but the amount depends on your history rather than on a single customer's credit.

When ROI Funder is not the right fit

If your business is too new or the order dwarfs your revenue, specialized PO financing may be the only route.

A startup with one huge order and little history may not meet our minimums. If the order is many times your monthly revenue, general funding may not stretch far enough, and a PO financer that underwrites the buyer is more fitting. In that case we suggest comparing PO financers directly and asking for the full fee schedule.

For the concept in more depth, read what is purchase order financing.

Questions to ask any PO financer

Ask about fee accrual, supplier eligibility, minimum order size and what happens if your customer pays late.

1. How is the fee calculated, and does it rise each month?
2. Are there minimum fees or minimum order sizes?
3. Which suppliers do you pay, and are overseas suppliers allowed?
4. Who controls the collection of the customer's payment?
5. What happens in a dispute or a partial delivery?

Compare the answer on total cost to the alternative: funding the order from a line of credit and keeping the customer relationship fully in your hands.

A worksheet to decide whether the order is worth financing

Subtract all costs, including financing fees and late-payment risk, from the order's revenue before you accept it.

1. List the order's revenue, such as $100,000.
2. Add the supplier cost, shipping, duties and packaging.
3. Add the financing fee for the expected payment window, then for a window twice as long.
4. Subtract all of it from revenue to see profit in both cases.
5. Ask what happens if the buyer cancels or disputes the delivery.

If profit survives the longer window with room to spare, the order is probably sound. If one slow payment wipes it out, negotiate better terms with the buyer, such as a deposit, or decline. Many owners accept orders on margin that looks fine on paper, then discover freight, returns and payment delays erase it.

Also confirm that your supplier can deliver on schedule. A financer pays them, but you carry the risk that goods arrive late or defective, and your customer will hold you responsible.