Page written by Chris Godfrey. Last reviewed on July 23, 2024. Next review due January 1, 2025.
Never miss a customer order again. Purchase order financing can give you the funds to complete all your orders even if your cash flow or regular borrowing facilities are overstretched.
Purchase order financing, also known as PO financing, is a cash advance that lets small businesses pay for goods to fill a customer order when they lack the funds to buy the goods themselves. Useful when your cash flow is weak or your regular credit facilities are maxed out, a PO loan means you don’t have to turn an order away because you have insufficient inventory or lack the cash to buy new stock from your suppliers.
With purchase order financing, a lender pays your supplier up to 100% of the cost of the goods you need. Once your customer receives the goods, they pay the lender directly. The lender then recoups their loan (plus interest charges and fees) and passes the surplus – your profit – back to you.
Purchase order financing will accrue interest and fees on the loan. Interest on most PO financing is calculated on a 30 days cycle – with interest rates varying from 1% to 6% per month. This means if you borrow at 2% per month and your customer paid the lender within the first 30 days, you will be charged 2% on the total loan.
However, if your customer takes longer to pay, say 60 days, then you will be charged 4% (2% x two months) on the total and so on. Be aware that this type of interest may seem low at first, but on an annual basis, it can be expensive. PO financing typically comes with interest rates that are more than 20% per year.
Like all business loans, purchase order financing has its advantages and disadvantages:
Pros:
Cons:
Working with a PO financing lender that fits your business model is important. Here’s what you need to know:
If PO financing is not a viable option for your business, don’t worry. There are other ways to fund your customer orders:
Loan type | What is it? |
---|---|
Business term loans | The simplest and most common type of business loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Collateral may be required. |
Invoice financing | This type of loan allows you to borrow against the value of your unpaid invoices and is best for B2B organisations. The lender will usually provide up to 95% of the invoice value within a few days or even hours of the bill being raised. Your invoices act as security for the loan, no other collateral is required. |
Business line of credit | Functions like a high-value credit card but comes with lower interest rates and fees. Withdraw as much as you want when you want from a loan facility up to the limit of their borrowing. A line of credit can give you excellent peace of mind – you have access to funds when you need them, but you only pay interest on the sums that you withdraw. Collateral may be required. |
Merchant cash advance | Available for businesses that accept customer payments by credit and debit card. You borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required. |
Revenue-based financing | Functions like a merchant cash advance but with higher borrowing limits. Based on the size and regularity of your total revenues, (not just your credit card sales), you may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from your daily sales. Your sales act as security for the loan, no added collateral is required. |
No matter if you’re seeking your first purchase order loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for your funding. Contact Swoop to discuss your borrowing needs, get help with your application and compare high-quality purchase order financing from a choice of lenders. Give your business the financial firepower it deserves. Register with Swoop today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.
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