Purchase order financing

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Page written by Chris Godfrey. Last reviewed on October 29, 2024. Next review due March 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.

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What is purchase order financing?

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.

How does purchase order financing work?

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 example:

A customer places an order with your company
You get a cost estimate from your supplier to produce the order
You send the customer order and the supplier’s estimate to a lender
The lender pays the supplier for the goods – up to 100% of the cost
The supplier produces the goods and ships the order to the customer
You invoice the customer and send a copy of the invoice to the lender
The customer pays the lender direct
The lender recovers their loan plus interest charges and fees from the customer payment
The lender sends the surplus cash to your business bank account

How much does purchase order financing cost?

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.

PO financing cost example:

You borrow R50,000 to fulfil a customer order
The rate is set at 2% per 30 days the loan is outstanding
The customer pays in 30 days
You pay back the R50k plus R1,000 interest and fees

What are the pros and cons of purchase order financing?

Like all business loans, purchase order financing has its advantages and disadvantages:

Pros

Fill all your customer orders: PO financing can cover gaps in cash flow, seasonal income streams, or an overload of new orders. Accept all incoming orders without worrying about how you will pay your suppliers
Easier loan qualification: PO financing is more dependent on the credit worthiness of your customer and the reliability of your supplier than it is on your organisation’s credit history. Although you will still have to provide basic financial information, such as bank statements, the more relaxed rules of PO financing make it more likely that your business will be approved for a loan.
Simple budgeting: PO financing is officially classed as a business cash advance, and you repay the funds you have borrowed in one lump sum direct from your customer’s payment to the lender. There’s no need to make regular weekly or monthly debt repayments or worry about maintaining a reserve in your budget.

Cons

Higher borrowing costs: PO financing interest charges may only be a small percentage of the sum you borrow for every 30 days the loan is outstanding, but on an annual basis, this can add up. PO financing interest rates are typically more than 20% per year.
Customer reliability: The total cost of the borrowing is determined by how long it takes for your customer to pay. If they are slow, you pay more interest. This uncertainty also makes it more difficult to factor the borrowing costs into your upfront estimates. You are also reliant on your customer’s creditworthiness to get a PO loan. If their credit history is spotty, it may impact your ability to get financing and how much interest you must pay.
Loss of control: PO financing gives a lot of power to your lender. They pay your supplier and collect from your customer without much involvement from you. The goods are also shipped direct to the customer, so you do not have the chance to check their quality. Mistakes by these third parties could damage your customer relationship through no fault of your own.

How to choose a purchase order financing company

Working with a PO financing lender that fits your business model is important. Here’s what you need to know:

Experience

Does the lender provide many types of business finance? If so, how often do they provide PO financing? You want a lender that is comfortable with providing this unique type of loan.
Do they have experience with your industry?
How long have they been in business? Can they provide customer references?

Financing process

Is there a minimum funding amount that you have to meet to get a loan?
How does the lender pay your supplier? For example, is it cash or a letter of credit?
How does the lender collect payment from your customer?
Do they contact your customers directly? If so, how and why?
What happens if your customers fail to pay?
How does the lender vet your customers and suppliers? What is their process?
How fast will you get your money after your customer pays the lender?

Fees and other requirements

What are the lender’s typical fees and how are they calculated and applied?
How much of the supplier’s cost will the lender provide – for example, 100%?
Do you need to provide collateral or a personal guarantee?
What kind of financial documents must you provide to get a loan?

What are the alternatives to purchase order financing?

If PO financing is not a viable option for your business, don’t worry. There are other ways to fund your customer orders:

Alternative types of business loan

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.

Get started with Swoop

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 Godfrey

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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